Good day and welcome to the Trinity Industries’ Third Quarter Results Conference Call. At this time all participants are in listen only mode. [Operator Instructions] 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, exceptions, intentions and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain of the business issues and risks, a change in any of which could cause actual results or outcomes to differ materially from those expressed in these forward-looking statements. Please note today’s call maybe recorded and I’ll be standing by should you need any assistance. It is now my pleasure to turn the call over to your Vice President of Investor Relations, Jessica Greiner. Please go ahead.

Thank you, David, and good morning, everyone. I'm Jessica Greiner, Vice President of Investor Relations and Communications for Trinity. We appreciate you joining us for the Company's third quarter 2020 financial results conference call. Our prepared remarks will include comments from both, Trinity's Chief Executive Officer and President, Jean Savage; and Eric Marchetto, the Company's Chief Financial Officer. We will hold a Q&A session following the prepared remarks from our leaders. Joining the call today, we will refer to a few slides highlighting key points of discussion. The supplemental materials are accessible on our IR website at www.trin.net. These slides can be found under the Events & Presentation portion of the site along with the third quarter earnings call event link. It's now my pleasure to turn the call over to Jean.

Thank you, Jessica, and good morning everyone. Trinity has been on a transformative journey over the last year to realign our business, our people, our cost structure and their purpose to deliver superior returns to our shareholders. The timing and execution of these initiatives were challenged by the COVID-19 outbreak. I want to commend our people and our business leaders for their resiliency and commitment to overcoming the hurdles caused pandemic and their efforts to establish our strategic framework for the future. All while delivering high quality products and services to our customers. As a major milestone in our journey, Trinity will host a virtual Investor Day in four weeks. At this event the management team will present our value proposition and strategic framework for accelerating our financial performance. Today we run the focus on the results of the third quarter and highlight how our results and actions taken during the quarter align with our goals that you will hear more about in the coming months. The goals of our strategic framework are to one optimize the returns of our lease fleet. Two, reduce the impact of cyclicality and three, to increase model advantage of the railcar industry. In the third quarter Trinity implemented its new strategy. We expect these strategy shifts to drive operating model performance and generate superior shareholder returns. Our strategy is grounded in our newly defined purpose of delivering goods for the good of all. This purpose seeks to emphasize for all Trinity stakeholders the essential role that rail transportation plays in our daily life as we dinner with our family, clean our homes, queue our cars and lead a safe and happy life. Trinity has a rich history, a legacy of strong growth and a reputation of flexibility. With these attributes and our new focus…

Thank you, Jean and good morning everyone. Trinity’s platform has demonstrated the ability to generate significant cash flow from originating railcar transactions that leverage the synergies of our business model. We believe the cash flow generation from our platform and the ability to optimize our balance sheet within a disciplined capital allocation framework will create long term shareholder value. During the third quarter Trinity generated $129 million of cash flow from operations resulting in year-to-date adjusted cash flow for operations of $596 million. Our investments for the quarter included approximately $183 million of net lease investments for railcar additions and fleet modification and $29 million for other enterprise capital expenditures. As Jean has said, optimizing of the Trinity rail platform has been a key focus for management and the board in the last year. We’re addressing optimization in all areas of our organization, our operations and our balance sheet. The combination of balance sheet optimization with a disciplined capital allocation framework underscores our commitment to being a return focused company. We made additional progress in the third quarter and since quarter closed and reasonably leveraged on our lease fleet to lower our cost of capital. In late July we completed the upsizing of our TRL 2017 financing with an additional $225 million debt funded at LIBOR plus 150. Earlier this week we also redeemed $153 million of secured railcar equipment notes bearing interest at 3.8% initiated new $156 million securitization bearing interest just below 2%. We’re further evaluating the capital market and taking advantage in attractive industry environment to lower our cost of capital. Trinity is operating in-line with the base case scenario that we presented to investors as a guide post at the start of the pandemic. As contemplated within our base case scenario we’ve maintained our dividend and…

Thanks Eric. This is a very exciting time for Trinity, our people and I believe our investors well much has been said about the obvious challenges throughout 2020, this year has been a year for tremendous positive change at Trinity. Our work has led us to prepare for a fresh start, a new perspective and the new operating model. In addition to the opportunity to own a strategy and operating structure I mentioned in my first earnings call as CEO that I believe there is a real opportunity to accelerate Trinity’s position as an industry leader in the railcar market through innovative products and services. We believe this strategy will transition Trinity to a higher quality recurring relationship business model. The focus of our strategic framework, we will layout at our Investor Day will focus on the following theme. One, to optimize the returns and performance of our fleet. Two, to reduce the cyclicality of our business model and three, to increase the moto advantage of the railcar industry. We look forward to discussing these topics in more with you on November 19 and will now take some time to answer your questions on our third quarter performance results. Operator will you please give our listeners the instructions for the Q&A session.

[Operator Instructions] And we will take our first question from Bascome Majors with Susquehanna. Please go ahead your line is open.

Yes, good morning and thank you for taking my questions. Looking at the average sales price implied in the backlog it looks like it may have been revalued lower this quarter. Can you speak to that? What's driving that if that is the case and may be any comments on the timing and magnitude of further manufacturing rationalizations that you kind of alluded to in the prepared remarks?

Okay. For the backlog it was just an adjustment on material cost that we've seen and so it wasn't due to cancellations but just the adjustment on material. For the rationalization of facilities, we mentioned that we have to complete lines in production before we can make any changes and some of that is people related, some of that is facility related. As we look at our facilities we look at what workflow we have committed to them and as we see that either decline or we choose to move that work elsewhere we'll be able to take actions and to say which facilities will remain and are crucial to the ongoing business or which ones that we will go ahead and reduce or take out.

Okay. Thank you for that. On the leasing business the margin was higher than it's been historically and some of that you had alluded to it's the depreciation, reduction from the small cube covered hopper right down, but maintenance expense also played a pretty big part on that. I'm just curious on the maintenance front what's driving that and how sustainable is this lower run rate as we look forward to the profitability in that business?

So if you look at year-to-date our maintenance expense has down about 15%. Some of that is driven from the fact that people aren't releasing the cars. So if you don't have the cars you can't do the work. Other parts of that due to our being able to do more of that work internally and when we can do that work internally we have the ability to lower the cost and improve the turn times and then the third part of that is the AAR expense. The work that's being done under AAR billing is lower so that would be more of the running repair type work not the planned repair. So all of those combined to have the improvement that you're seeing.

Do you think any of that is sustainable or is it just the number of things coming together in the same quarter?

I think some of it is sustainable. So as we look again at what we can move in-house we've proven again our cost to do that working house is lower and again we get the cars turn quicker so they're out to our customers and then as far as the AAR the railroads have reduced manpower throughout their systems and I think that may be having a little bit of an impact on their ability to do some of the running repairs. There is also it's better for everyone if those type of repairs can be done at either the beginning or origination or at the end of those loads so you're not stopping or disrupting the flow of the traffic.

Okay. Last one from me I know you said that we'll get a much more significant capital returns update in a month at your Investor Day but if I recall from some of the nature of the tax free spin that you did and are about to have the two-year anniversary on there were some limitations on your ability to recapitalize the business. You're about to lap that does that give you an opportunity to be more aggressive with perhaps another ASR or some pull forward on this incremental 250 million buyback you just authorized and maybe even if you can't answer that I'm curious if the 2021 end date implies that you hope to complete this 250 million by the end of next year?

Bascome this is Eric. As far as an ASR goes we certainly have that ability to do it, but we have not announced anything at the, $250 million authorization is a little shorter window than we've normally put on it just running out through the end of next year as you mentioned and business conditions continue like we said back in April when we put out our base case in our stress case along our base case we expected to fulfill our last authorization which we did we completed this quarter and so if things continue along that trajectory then we would expect to complete it. If market changes we'll adjust.

Thank you.

Thank you.

Thanks.

We'll take our next question from Matt Elkott with Cowen. Please go ahead. Your line is open.

Good morning. Thank you. Jean did you say 11,000 deliveries this year? Did I hear that correctly?

I said just over 11,000 deliveries this year yes.

Okay. So I guess the fourth quarter delivery number is just over 1,700. I was wondering how much a margin downside is going to come with the lower delivery number? I mean are we getting into the negative and by how much?

So we're not getting guidance. So I can't tell you what that margin is going to be but the work that we have been doing this year and that we'll talk about in November is getting the structure in place. So even in a normal down cycle we won't go negative. We've made some strides on that. You've seen that in the numbers that we're showing you in the supplemental materials. So to help you, we've made a lot of improvements. I just can't give guidance.

Okay. It's plausible that the margin will be fairly stable in the fourth quarter despite the lower deliveries.

That's possible yes.

Yes. Okay. And then another question that's a kind of a bigger picture industry question. Rail traffic is starting to head in the right direction and it looks like we're going to have rail traffic growth in the foreseeable future that hopefully will be sustainable. But this will be the first time I think ever that we have rail traffic growth while all the railroads are implementing PSR. Are you guys starting to get calls from cost existing or new customers that are concerned about this or from your angle from your conversations with customers are you starting to get any sense of disruption in the rail network?

So Matt we aren't getting calls from customers without concerns. Right now I think everyone's just cautiously optimistic that things are moving in the right direction. Three straight weeks with year-over-year improvement something we haven't in the total rail traffic numbers, something we hadn't seen since the beginning of 2019. I think have us all thinking maybe it's going in the right direction there and then we've had 75,000 cars come out of storage in the last quarter. So that's also a great indicator that things might be heading up. So we may have bottomed and started the upturn.

And then if I may one last question on the guard rail segment. I noticed in your release that part of the reason SG&A declined was lower litigation risk. I guess which may have something to do with the core system disruption through the pandemic. But I think the overall risk to you guys is pretty much behind you on that front. Now when this whole litigation issue is completely out of the way would this segment be a consideration for divestiture?

Matt we have talked in the past about the fact that when the timing was right we would look at possibly divesting the highway business to the right partner. So is it on the table still? Yes we would consider that. We just have to make sure that it makes sense for us in the marketplace and as you mentioned the litigation is in the point where that can happen.

Got it. Thank you very much Jean.

Thank you.

We'll take our next question from Gordon Johnson with GLJ Research. Please go ahead. Your line is open.

Hey good morning everyone. This is James Bardowski in for Gordon. For your balance sheet optimization I know previously you were targeting about 60% to 65% leverage. You reported 57.9 last quarter. Is there any change to that prior leverage target?

Hey James Eric Marchetto. No we've talked about that 60% to 65% target we have not changed that target. We're currently as you mentioned right around 58% Capital markets are very attractive right now as I said in my prepared comments. So we will, we would just, we just closed on a transaction earlier this week as I mentioned and we will continue to evaluate those markets.

Okay. Great. And also I remember you guys mentioned it in the second quarter press release as well, but you raised your maximum leverage covenant. Can you just quickly remind us to what the new target is?

So we didn't disclose what the new target was but we did adjust our covenants as we put out our base case and our stress case scenario back in April. When we looked at the stress case we looked to mitigate items and one of the things that we wanted to make sure was that we had ample liquidity. So we worked with our corporate revolver banks and amended that covenant that will run through 2021. We thought that was a good inexpensive insurance policy in the case we got into a stress environment.

Okay that's helpful. Very helpful. And also you guys mentioned that this new Midwest facilities will likely be a headwind to your margins. I know this is kind of reaching into the guidance realm. But do you have any idea of or can you give us any idea of what the magnitude of that hit one might be or how long it could last?

So this is Jean. In my prepared remarks I did say that the facility would be accretive in 2021. So it's just the fact that you have to ramp up the facility, make sure that you get the volumes and the training to cover all the cost and that is probably as far as I can go without giving any guidance.

Yes. That's fair. Thanks Jean. And then I just ask one more and then I'll hand it off. Last quarter you guys had about 40% of your backlog you expect to be recognized this year which is kind of basically on point with the 11,000 shipments you just guided today. So is it safe to say that the 2,000 order you receive is for next year? Can you just talk a little bit about the mix of these orders? You mentioned earlier that the transactions are more complex but then when we look at the value of their orders it's down roughly 30% year-over-year. So where are you seeing the real value here?

So when you look at that when I'm talking about complex it's our ability to work with some of these customers and maybe take some car types they don't need any longer back into our fleet that we can put back out in lease, provide them with a new car build and management possibly or maintenance for those cars. So it's coming up with a transaction that's more than just a car sale and that's where I talk about complex. The 2,000 cars that we did get were a lot of what we talked about in second quarter came through but there was also a mix of some other cars.

Okay. That's helpful. So that ties into the whole customer service dynamic. All right. Well thanks. Thank you for your time everybody.

Thank you.

We'll take our next question from Allison Poliniak with Wells Fargo. Please go ahead. Your line is open.

Hi guys good morning. So I just want to talk to the cost opportunities. You've been really aggressive on the cost reduction activities which makes sense, but as you look you're evaluating some I would say further opportunities. Should we think they're more cyclical in nature here or just because of the volume declines and such are some more I guess greater structural opportunities becoming available to you? Any color there?

So we're looking at both, but I would say in the structural side of it we've got work going on to make sure that we're keeping the higher value added processes in our facilities and either subcontracting or going to supply base for some of the lower value add. As that work happens that will transition out of our facility that will be more of a structural cost reduction for us and then as we look at potentially getting rid of some non-operational facilities or selling them that's also going to be a structural move for us. So we've got our eye on any cost opportunity that we see and we're carefully bucketing them between what could be structural and what may be cyclical. We want to position ourselves we keep talking about a lower breakeven point and making sure that as we go through a cycle we can get our margins in a more controlled manner or range and we'll talk more about that in November.

That's helpful. And I would say I know you're going to talk about it a little bit more in November in terms of manufacturing and kind of lessening that variability. I guess within that are you sort of narrowing your focus on what you'd be willing to build as a result?

So what we're doing is we still have a broad range. We're building for ourselves and for third parties. We expect to continue to do that. It's just the way that which we build. Again by doing some of that outsourcing we'll have the need for fewer head counts to produce the same number of cars that we've produced in the past. As we look at our indirect and direct material costs or services that we get and bring those costs in everything we're looking at is helping us to lower those costs and making sure as we go through an upturn we don't go through a high increase in our cost structure to make that happen.

Understood. Helpful. Thank you very much.

We'll take our next question from Justin Long with Stephens. Please go ahead. Your line is open.

Thanks and good morning. So I wanted to ask about the lease fleet eliminations. If you look at the implied margins there last quarter they were about 7% versus rail group margins they were about 2%. In the third quarter if you look at the implied margins on those lease fleet eliminations they fell a good amount to 1.6% and that was closer to what we saw in the rail group. Was that gap closing just a function of mix and maybe you could just talk about how you expect that gap to trend going forward? Should those numbers trend more in line?

Hey Justin this is Eric. The short answer is yes. They should, let me explain a little bit. So when we sell railcars from, when we transfer railcars from our manufacturing segment to our leasing segment we transfer those in market. So if it's the same mix then the margins should be very similar on the eliminations versus the rail segment considering, there is other things that go into that the lease rates, etc. the car types, etc. but generally speaking those should move in tandem.

Okay. And it sounds like going forward you're not anticipating any major differences and mix between what you're delivering externally versus internally for the lease fleet?

Well going forward we're not providing any guidance. So but again if mixed were, if you control for mix they should be in line with the elimination margin and the segment margin should certainly be in line. Now there is other things in that segment margins such as your maintenance services and other things but the line share is going to move in line with the rail segment margin.

Okay. Got it. That's helpful. And there was commentary around the expectation for deliveries this year, but if we look at the backlog today could you talk about how many units are locked in for 2021 at this point and just in terms of margins I know you're not giving specific guidance but when you look at those 2021 deliveries that are locked in directionally do you think margins can be up versus what we've seen in the past couple of quarters?

So we're not getting guidance. So I really can't tell you the number of units locked in, but I will talk to you again about the fact of the work that we've had going on this year that will continue and we'll talk about in November for reducing our overall cost structure and when you reduce that cost structure that should allow you to have higher margins that are coming out of that. So if we continue along the path that we've been on and we've been sharing with you what our goals are, our expectations and then we share with you when we pass those and even in the release that just came out we talked about we've hit the 80 million which we told you was going to be 70 and we're not done yet. So we'll continue to look at how we can improve those margins and not just for the short term not just for the down part of the cycle but how we're going to be able to change our methods and modes to be able to help the overall cycle performance.

Thanks Jean and just one last quick one you mentioned the number of railcars in storage coming down. Do you have a view on where that percentage of cars and storage needs to go before we get to a more of a replacement demand level for new railcars?

So what we need to do is get the moving railcars up to about 85% or around that mid 80s 85% to 87%. When you have that many running you're going to see a lot more new railcars coming out and just a little other color for you besides railcars coming out we've had some scrapping of railcars this year and through the third quarter there were 40,000 railcars scrapped. If you use that run rate through the end of the year that would put between 50,000 and 55,000 being scrapped and the delivery expectations for this year's according to third party is about 31,000. So we're going to actually see a net reduction in the fleet size this year and that contraction has not happened in the last 10 years. So that's also a benefit for getting some cars out of the system and then opening up the need for new railcar deliveries.

That's a good point. I appreciate the help.

Thank you.

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

Hey good morning.

Morning.

Jean you said you expect to transform rail shipping in the future that seems like a pretty bold statement. Can you talk a little more about rail pulse or how fleet analytics will transform the industry?

Sure. We've talked in the past about the fact that PSR is really focused on just one railroad in their line and what they can do and in order to really affect that supply chain we've got to get across the entire system, ecosystem which means across railroads, across different lessors, being able to see that information and the shippers, to be able to make smart decisions and to be able to overcome some of the hurdles that is stopping them from going from the trucking mode into the rail mode.

So really this would be you from the car side trying to help the class ones with system fluidity or just being able to get better asset utilization?

It's not just the railroads on that. They do play a part. It's really helping the shippers because once the shippers are confident in their supply chain and that they're going to be able to maintain the inventories at a level that they can sustain and not worry about getting a product in on time so they have that utilization of overall assets being the highest the better off we're all going to be in the industry.

Right. I can anticipate what people are going to ask which is if you increase system fluidity doesn't that imply that you need less equipment over time?

It could mean that. The other thing is though railroads continue to push out their portion of the railcars and if we increase mode share that would be a great way to increase the number of railcars that are needed.

Right.

It's more sustainable. We really have to keep getting that message out there as far as the mode of transportation other than shipping rail is the second best sustainable method for getting products around the U.S. So we really need to make sure people understand that especially as they're talking ESG.

Yes. Understood. And you talked about the net reduction in fleet size this year and over the past few quarters you've talked about expecting to take market share. I'm just curious what you think the trajectory of the railcar fleet itself will be over the next few years? I guess do you take the over the under on the current fleet of 1.7 million cars?

Wow that's good. I haven't thought about that one. That one may be a little tough. I will say that I expect or we're expecting for next year that you might see a contraction or more railcars getting scrapped. The new railcars getting delivered. Past that I don't know that I'm prepared to answer. We may be able to follow up.

Steve just add that when you look at the flammable fleet with the regulations that came out you know there is going to be some retirements that have to happen in that fleet that would be relatively early relative to a 50-year car life. So you are going to have a bit of a right-sizing event as those regulations as the end dates come to those regulations which 2023 for ethanol and 2025 and 2029 for other flammable products. So that will force a little bit more attrition than what historically would have been normal.

Yes. That's exactly what I was going toward is you're going to have some flammable cars come out. You probably have some flammable cars which are maybe permanently impaired. So you need mid single digit fleet growth to be flat maybe 10% growth to show meaningful upside. So the question is what sub, which categories of cars could expand to offset that kind of reduction that we're talking about?

Well yes, I think you're still going to have I mean if at all as a function of industrial production and where industrial production grows and that's what some of the things that we're looking at is as North America as some things in the on shoring that may happen if that continues then you'd have increases in industrial production and you're going to see that and we think rail will be well served to serve industrial production especially if we can get the modal share growth and they can take, one of the one of the good examples there is whether it's agricultural and food type products that a lot of that moves by truck now and if we can successfully move more of that to rail then that there is an opportunity for growth.

Appreciate it and looking forward to the 19.

Thanks Steve.

And there are no further questions on the line at this time. I will turn the program back to Jessica Greiner.

Thank you David. As Jean mentioned we look forward to engaging with you all again in four weeks time at our upcoming Investor Day on November 19. Registration for the webcasted event is now open and can be found on the events and presentations portion of the website. Also please note we expect Trinity will file our Form 10-Q within the next week. If you have questions on the company's quarter financial results press release I'm happy to follow up with you. A replay of today's call will be available after 1 o'clock Eastern Standard Time through midnight on October 29, 2020. The access number is 402-220-1140. A replay of the webcast will also be available under the events and presentations page on our Investor Relations website located at www.trin.net. That concludes today's conference call. Thank you for joining us this morning.

Thank you for your participation and you may now disconnect.