Trinity Industries Inc (TRN) 2025 Q3 法說會逐字稿

Good day everyone, and welcome to the Trinity Industries Third quarter ended September 30th, 2025. Results conference call. After today's presentation, there will be an opportunity to ask questions.

Before we get started, let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and includes statements as to estimates, expectations, intentions, and predictions of future financial performance.

Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10k and other SEC filings for the description of certain of the business issues and risks, a change of in any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. At this time, I would like to turn the conference call over to Leigh Anne Mann, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. We appreciate you joining us for the company's third quarter, 2025 financial results conference call. Our prepared remarks will include comments from E. Jean Savage, Trinity's Chief Executive Officer and President, and Eric Marchetto, the company's Chief Financial Officer. We will hold a Q&A session following the prepared remarks from our leaders.

During the call today, we will reference certain non-GAAP financial metrics. The reconciliations of the non-GAAP metrics to comparable GAAP measures are provided in the appendix of the quarterly investor slides, which are accessible on our investor relations website at www.trend.net. These slides are under the events and presentations portion of the website, along with the third quarter earnings conference call event link.

A replay of today's call will be available after 10:30 a.m. Eastern time through midnight on November 6, 2025. Replay information is available under the events and presentations page on our investor relations website. It is now my pleasure to turn the call over to Jean.

Thank you, Lianne, and good morning, everyone. As we approach year end, I want to recognize our team's dedication. Our third quarter results demonstrate Trinity's agility and strong business model. Trinity is raising and tightening four-year EPS guidance to $1.55 to $1.70 reflecting our confidence in the business model and execution capabilities.

Our leasing business continues to benefit from strong market dynamics, higher lease rates, and favourable pricing on external repairs. We're also seeing continued opportunities in the secondary market, further reinforcing our position as an industry leader. On the manufacturing side, our team delivered impressive results, achieving a solid operating profit margin of 7.1% with a favourable mix of specialty rail cars and improving operational efficiencies despite a lower delivery environment.

I am proud of what we have accomplished together and confident that our continued focus and teamwork will drive teacher success. Before discussing our quarterly results in more detail, I would like to provide a brief market overview. Strong renewal success and steady lease fleet utilization across the industry indicate customers continue to size their fleets anticipating future demands.

While persistent market uncertainty has delayed customers' decisions to invest in new railcars, customers are still holding on to existing railcars. Overall, the North American railcar fleet remains in balance and is contracting as scrapping is outpacing new railcar deliveries.

I will now highlight segment performance for the quarter, beginning with the rail car leasing and services segment, which includes leasing, maintenance, and digital and logistics services. Leasing and services segment revenue grew year over year, driven by higher fleet pricing and strong utilization of 96.8%, which continues to represent a balanced and well utilized fleet.

Renewal rates were 25.1% above expiring rates in the quarter, with an 82% renewal success rate. The future lease rate differential was 8.7% in the quarter, driven by higher expiring rates and some lease rate moderation on certain railcard types. Despite this moderation, we remain optimistic about the leasing market. Furthermore, the secondary market remains very active, and we have capitalized on good opportunities to optimize and monetize our fleet. We added over $100 million of railcars into our fleet from the secondary market and sold $80 million of railcars in the quarter.

We find value in utilizing the secondary market as both a buyer and the seller and remain pleased with the performance and yield on our fleet. We expect secondary market activity to accelerate in the fourth quarter, and we plan to end the year within our guidance range for our overall net lease investment. Trinity's maintenance business continues to benefit from industry-leading turn times, which allows us to lower the cost per maintenance event for our lease.

Turning to the rail product segment, which includes our manufacturing and parts businesses, market conditions remain challenged. Industry railcar orders remain depressed in the third quarter. By proactively adjusting production, together with a favourable mix of rail cars, we improved efficiency and achieved 7.1% operating margin in the rail products, despite lower deliveries of 1,680 railcars. 46% of our deliveries in the quarter went into our lease fleet, and we expect the full year number to be between 30% and 35%.

In the quarter, we received orders for 350 rail cars. This order number reflects the broader market conditions. Industry orders in the quarter were 3,071, well below expectations in a replacement cycle. While industry orders remain below expectations, our conversations with customers indicate potential for future growth. With these conversations and the replacement, the demand we have We have not changed our longer-term outlook for the industry.

Our backlog stands at $1.8 billion with approximately 21% expected to deliver by year end. We currently hold about 50% of the industry backlog. In conclusion, I am pleased with our performance in the quarter. We are delivering results consistent with our expectations and reflective of market conditions.

The Trinity integrated platform of railcar leasing enabled by manufacturing and services, makes it easier for our customers to use rail. We have a multitude of levers to deliver steady profitability and cash flow through a cycle, whether it's repriced leased cars, selling leased railcars in the secondary market, investing in the fleet, building new railcars, or supporting elevated railcar repair and compliance needs. Trinity is designed to deliver value to shareholders and customers alike.

As we head into the last few months of 2025 and into 2026, our fleet is well positioned to generate significant and consistent cash flows, and our manufacturing footprint is right sized and ready to efficiently meet railcar demand when it fully returns.

I'll now turn the call over to Eric to talk through financial results as well as our updated guidance for 2025.

Thank you, Jean, and good morning, everyone. I will begin by discussing our third quarter financial statements, starting with the income statements. Total revenues in the third quarter were $454 million down both sequentially and year over year due to lower external deliveries in the rail products group. However, despite lower deliveries, earnings per share in the quarter of $0.38 are up sequentially due to the favourable margin performance in the rail products group.

As previously noted, we are seeing the benefits of the decisions we made earlier this year to right size our organization. We're expecting full year SMA savings of approximately 20% as compared to 2024, and we'll end the year at a lower run rate as we move into 2026. Moving to the cash flow statement, year-to-date cash flow from continued operations was $187 million. Our net fleet investment year-to-date is $387 million above our full year guidance of $250 million to $350 million.

Implying a negative fleet investment in the fourth quarter as timing of rail car sales are heavily weighted in the fourth quarter. Year-to-date gains on lease portfolio sales are $35 million. We anticipate full year gains of $70 million to $80 million. Year-to-date we have returned $134 million of capital to our shareholders through a combination of dividends and share buybacks. We continue to be opportunistic in a return of capital and continuously evaluate our capital allocation options to generate favourable shareholder returns.

Moving to the balance sheet, our cash balance is $66 million and total liquidity is $571 million. Our asset balance includes $162 million of finished goods inventory.

The majority of which we expect to deliver in the fouth quarter and convert to cash. Our loan to value ratio of 68.5% remains within our target range of 60% to 70%. Earlier this week, we completed the financing of our TRL 2025 notes and used the proceeds to repay borrowings under our warehouse, redeem the outstanding debt of TRL 2010 notes, and for general corporate purposes. We were pleased to have strong investor demand for these notes and benefited from lower benchmarks and tightening spreads.

And now moving on to our expectations for the fourth quarter and the full year 2025. We maintain our outlook of full year industry deliveries of 28,000 to 33,000 rail cars, reflecting the muted current railcar environment. We expect the industry to scrap about 40,000 rail cars this year, which means we expect contraction in the North American fleet this year.

As previously mentioned, we are maintaining our net fleet investment guidance of $250 million to $350 million for the full year, implying a negative net fleet investment in the fourth quarter. We expect substantial rail car sales in the fourth quarter, more than offsetting additions to the fleet from origination and seconding market purchases. However, we still expect overall fleet growth for the year, meeting our one-year target and keeping us on track for a three-year target of $750 million to $1 billion of net fleet investment between 2024 and 2026.

We continue to prioritize investment in our fleet as this provides sustainable long-term returns. And finally, we are raising and tightening our full year EPS guidance from a range of $1.40 to $1.60 to a range of $1.55 to $1.70. We are on track to our forecast for deliveries and expect rail products segment margin performance of 5% to 6% for the full year. Additionally, our leasing margin before gains is on track with prior expectations. Therefore, with conviction in our margin performance as well as expected higher gains on rail car sales in the fourth quarter, we're raising our full year EPS guidance.

In closing, I want to emphasize that we are growing our lease fleet while capitalizing on strong secondary market conditions. Additionally, we have reduced costs which allows us to operate more efficiently and profitability and profitably and improve our returns. In short, our platform provides flexibility and resilience, which are demonstrated in today's results and commentary. We look forward to sharing our full year results with you in February and we will provide our expectations for 2026 at that time.

Operator, we are now ready to take our first question.

(Operator Instructions) Andrzej Tomczyk, Goldman Sachs - Analyst

Hey everyone, morning thanks for taking my questions just a little curious, maybe starting at a higher level if you could just discuss the current rail card delivery and order environment in a little more detail and in particular. You know how many quarters? I know book to build still is below 1 this quarter, but you know how many quarters of book to build above 1 should you guys expect to see before sort of having confidence in a more sustainable upward trajectory in demand for rail cars, and would you expect to see that in 2026? Thanks.

Well, good morning, Andrzej. Thanks for the question. When you look at our backlog, remember we've got that multi-year order out there that's got about 50% of the industry backlog sitting there. So for us, when you're looking at order entry, it may mean something a little bit different because you have to take that into consideration.

When you look at our projection for this year for industry deliveries, it's 28,000 to 33,000, which is below replacement level demand right now, and we're looking to see something similar in 2026 right now. And so I think on the book the bill can't tell you when it's going to be above one again. We're still having strong inquiries. We're having really good discussions with customers. It's just taking them longer in this uncertain environment to make the decision to take it from an inquiry to an order.

Understood and maybe just on that guidance for the 28,000 to 33,000 industry deliveries, how much of that delivery GAAP versus replacement level demand of around 35,000 to 40,000 would you say is driven by customers already having what they need relative to their expectations for freight demand versus customers just delaying orders that they know they need to make but are maybe more just holding off now due to policy uncertainty around tariffs and trade.

So, what we are seeing is really a delay in placing those orders. If you look at the pace of scrapping, we're expecting about 40,000 cars to be scrapped this year, which means we'll have a contraction in the fleet, North American fleet again this year. And so at some point they're going to have to order, so we believe it's more delayed and we'll see a pick up later on once certainty becomes more prevalent on the car orders.

Got it. And then once that delayed demand sort of comes back, would that lead to a scenario in your mind where deliveries sort of get back to above replacement level demand? And I guess just in that context, would that be a scenario that takes sort of several years to get back to the next peak from current levels which maybe you consider closer to trough?

Well, earlier I said we expect that, and we're not given 26 guidance yet, but we expect 2026 to be similar to this year for the industry. And when you look at that, I think you have to again take into consideration. That orders can be lumpy. We get a multi-year order sitting out there with 50% of the industry backlog. So it really depends on the scenario of how that plays into what some of the orders are going to be. But again, 26 similar to 2025, and then after that, we'll give guidance as we understand and see more with the certainty.

Understood. And I guess just as far as potential for class one rail consolidation, if networks move to be predominantly single line in nature in the future with less interchanging, does that effectively speed up the network and enhance rail industry asset utilization? And if so, how do you expect rails to balance the potential need for fewer cars due to better utilization versus the potential for a longer-term need for more cars if the networks sort of speed up to the to the degree that, rails can sort of extract share gains from trucks?

Yeah, Andre, this is Eric. I'll take that, and good question. That is fundamentally a question the industry is asking, and that is, will a transcontinental railroad, you're right, it should, with less interchange points, it should increase fluidity, increased speed, and the question is, will that give the opportunity for modal share growth. And the model share growth opportunity we think can offset any of the impacts from moving the same freight faster and that ultimately it can lead to industry growth and car, both Carlo growth and fleet growth. But that, that's been difficult to prove out in prior mergers.

But so the UPS have their work cut out to prove that out, but that's certainly what they're laying out as their rationale for the combination, and we're certainly hopeful that that's the case.

Thanks Eric. I appreciate that. And maybe just switching to leasing, I noticed that the FLRD dropped to, I think, about 9% from 18% last quarter. It seemed fairly sharp. I'm just curious on what caused that and if you sort of expect FLED to trend similarly to here.

So let me start out with saying that we're really happy with the leasing results of the quarter. Renewal rates were 25.1% above the expiring rates. We had an 82% renewal success rate and fleet utilization remain very strong at 96.8%, and we continue to see runway for lease revenue growth, both from repricing the fleet and ongoing fleet investment. When you look at the FLRD for Q3, it was the 17th consecutive quarter of positive FLRD. When you look at the step down, it was driven by higher expiring rates and some moderation of market rates for certain railcar types. And as you've seen in the past, this metric can be lumpy quarter to quarter. With 50% of the industry backlog, we have good visibility in what's going on there, and we believe the leasing environment remains favourable and our portfolio is well positioned to continue the performance that we've had.

Got it. And then maybe just lastly for me on the leasing if you could just bring us up to speed on how much of the book has been resigned at the higher COVID rates and maybe how much is left to reprice from here. Thanks for the time.

So, this is Eric, we have, one of the other things we have started to lap some of our renewals, that we've done in this environment that's also, impacted the. The FLRD, when you look at how much we repriced going back to the double-digits, it's about 65% of the fleet that's repriced, and we continue to see about 15% of that repriced in a year. So it's still got a tail. And then when you look at where rates are today versus when it started to be double-digits, you still got some opportunity there. So, as Gene mentioned, we're very encouraged by the The outlook for renewals and what we expect from revenue growth on leasing.

Got it thanks everybody for the time. I appreciate it thank You.

(Operator Instructions) Bascome Majors, Susquehanna. - Analyst

Yeah, good morning and thanks for taking our questions. I'd love to start where Andre left off there. Gene, I think you said that renewal rates were 25% this quarter, I just want to do a maybe a more detailed job of kind of reconciling that with the FLRD going down to 89% here. I imagine it has a lot to do with the denominator and the forward-looking nature of that, but just I think walking through that and with a bit more [granularity] would help us set better expectations for what leasing could do next year. Thank.

You. Yeah, that I'll take that one. So you're right. And so when you look at what's in the current or the expiring, the new contracted rates with the expiring rates, and those were we renewed, had an 82% success rate, and it was up 25%, so strong, people were paying up to keep the rail cars and that really gets into our sentiment. When you get into the FLRD, this is where the nuances and you've got different metrics out there that are indexes for lease rates. What our FLRD takes is the current rates in the quarter, for 25 different card types, and we compare it to those same, the current rates that we contract in the third quarter. We compare that to the expiring rates for those same car types for the next fourth quarters.

So, you're right, when you compare, you're comparing the, this, it's the same numerator in both cases in the 8% calculation and the 25% calculation. The denominator is different. The denominator in the 25% is the contracts we did in the quarter. The 8% is the contracts are expiring in the next four quarters, other than that same mix and everything else. So you do get a little bit, you'll get the FRD will get some volatility because we don't control for mix. It's not an index on our fleet. It's our actual explorations. So, it's more of an indication of what's going to happen on the lease price on those. Actual explorations, but from a market standpoint, you have your 25% up on the expiring rate. So does that help kind of explain the difference? Oh.

It helps a lot. So if we square ultimately that's telling us that. Your expiring rates are going to be about 15% higher next year.

Yeah there's, yeah, there's exactly. And that's a little bit of.

Laughing.

That's a little bit of laughing and that's a little bit of higher. Okay.

All right, so the, this is both a combination of maybe doing some short-term leases at the low part of the market and just the vintage of getting, past the. The weaker part of the cycle, yeah.

And yeah, the lapping would indicate, if you did, a couple 3 years ago, if you did a 3-year lease, then you're starting to lap it. And so that's an element of it. I don't want to over index on that. That's a part of it. No, understood.

And the other piece you mentioned was a little quarter to quarter moderation car types. Can you give us a little more fidelity and where things are stable to increasing and where things are a little bit softer sequentially.

So generally speaking, tank car rates for the most part are still very strong. We've seen a little bit of softness in some of the ag sector, which is kind of the expected with what's going on with trade on the agricultural piece. So that there's a little bit of that, but, it's Slight. It's not, we're not seeing big changes. We're still, when we look at all our different car types, we see many car types trending upward, and we see some trending downward. And so, the mix when you get to the mix and with the FRD, there was a little bit of a trend downward on some of the cars.

And Moving down. You talked about the earnings increase being largely a function for the full year guidance of both the higher gains expectation. I think you took that to was up from what, roughly [7], they were roughly 80 to 60 or something, yeah, and also you mentioned margins. Can you talk a little bit about. The fundamental drivers in the market that helped you kind of surprise your own expectation on both gains and the OEM side of the margins just as we think through, the sustainability and run rate of that next year.

Sure, I'll go ahead and start with that. When you look at the performance of the rail product segment, they had a really good quarter. Some of that was driven by a favorable mix of some specialty cars, but other parts were the disciplined operational execution that they had. And remember earlier in the year we had deliberately aligned our production with the expected volume, so we took some of those reductions in workforce or realigned that early on. That really helped us maintain those margins despite lower deliveries.

In the prepared remarks, we also talked about the fact that we expect in the year the 5 to 6% range, and then the fourth quarter we're expecting it to be in that 5% to 6% range. Reason for that is really the mix of cars that we're going to be producing in the quarter, but we think that, one, they're performing well, we think that with the program. We have in place for efficiencies for automation, we should see that continue to improve. We're not given 26 guidance yet, so I'm going to stop there and let Eric talk to you a little bit about the gains.

Yes, so on the secondary market on the gains. You're right, just to say it, we changed our guidance from $50 million to $60 million to $70 million to $80 million. And that is, it is, as you mentioned, higher than we expected. We're seeing a really strong sector market. We are looking in the fourth quarter continuation of our RV program. We have on some plan sales from one of our RV partners that gives us a lot of confidence, but we're seeing, we put assets out in the secondary market and we were pleased with what we saw in terms of the pricing, the expectations, the secondary market has been the prime has turned into the primary way that other operating lessors are growing. Fleet because of the softness in the new car market.

And so from that standpoint we're seeing it and then secondary but probably not to be forgotten is this summer you had a transaction between Brookfield GHX and Wells Fargo. I think that's driven more interest in the space. And so we're seeing good activity. And we're looking to take advantage of it. So, yeah, we increased guidance on it. We feel really good about that number, and, there's potential to do even more, whether that's this year or in the next year. So, we're excited about the opportunities.

Right, if you'll humour me, I just have two more, Eric, you were recently in the market with an ABS deal. I think this was your 1st of the year, and you'll correct me if I'm wrong there, but can you walk through the I mean you talked about the equity investor appetite just then on the gains on sale piece. Can you talk through the credit investor appetite for rail car assets what you were seeing in the feedback you've got on not just the key terms of, rate and term, but any of the other sort of, maybe drivers of flexibility and value for you as an owner that likes to keep your fleet flexible while financing it with steady term debt.

Thank you. Thank you. Great question. There's a lot in there, but yes, this was the first time we accessed the ABS market this year. We did access the bank market on the rail secured side earlier in the second quarter, but this is the first time in over a year we'd accessed the ABS market and demand was. Really strong, there hadn't been a lot of rail paper in the market recently.

We haven't had a Trinity name whichrinity name issued our TRL issuance always gets very positive reception. So from that standpoint, it did very encouraged. It's flattering how the investors really want to invest in our paper. When you look at the key terms, we do have a lot of flexibility with the asset trading that we like to do in the ABS market, and those are continuing to be there.

We actually had some green issuances come in, some green investors, and we do issue these under a green framework, and we had some of that, which was, encouraging to see even in the current environment that people are increasing allocations because of the sustainable nature of rail car leasing. And so that was all really good. We were pleased and we got we got fortunate with where the benchmarks were, and we were able to tighten our spread. So that was a really nice combination and really encouraged that market has been there with us for 25 years and it's going to be there in the future.

Thank you for that and just maybe tying up some of the other questions together.

I know you're not going to give guidance for next year, nor should you at this point, but high level from what we've heard today, it seems like you know from a manufacturing perspective, things feel kind of steady at a soft level. I just want to make sure that I'm not missing any sort of inflection in one direction or the other heading next year. From a leasing perspective, things still pretty good, although, just taking the FLRD at face value, it feels like we might get less sort of renewal income growth from leasing next year than this year. And from a secondary market perspective, things feel. Pretty gangbusters and that's not changing. I mean, are there any other things you kind of point us to on the puts and takes, high level directionally as we think about, what Trinity can do next year versus this year?

Well, I'm going to go to the fourth quarter and talk a little bit there. So, in the rail product segment, we're going to deliver about 21% of the backlog plus we have some near-term deliveries on top of that that will occur. So, you should expect a little bit of a step up there because we're expecting to end in our normal market share for deliveries.

And I've already said similar industry deliveries for next year, not expecting much change on the market share, so that's probably all I'm going to give you on that part of it. When you look at leasing, again, we still see opportunities. We'll have, cars we'll buy in the secondary market. We'll have new build cars that we'll put in there to grow, plus there's still room and a lot of car types to get. Higher rates. There's just some that are moderating more on that. And so I think all of that is good. Secondary market is we indicated really strong. We're going to be opportunistic throughout this year and I would expect it not to change a lot, but we're not giving guidance for next year yet.

And I would add, I think your framing was fair and accurate, and Gene's color is, I think, helpful, and then I would just Add to that, that's a backdrop where we've had a very flat industrial economy. Industrial production is still flat. So we're pretty positive in a flat industrial, production environment. And I think as you look ahead, I think that's going to improve at some point. I can't say when yet because of that uncertainty overhang, but I think the next move is positive and so that's where we see the operating leverage in this business potential that could really be helpful.

Thank you both. Appreciate the time.

Yes, thank you.

And ladies and gentlemen, with that we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to the management team for any closing remarks.

Well, thank you. As you can tell, we remain confident in our strategy and our ability to deliver value as the market conditions evolve. I also want to thank you for your continued support.

And with that we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.