Good morning and welcome to the Trinity Industries' Fourth Quarter 2020 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Before we get started, let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and includes statements as to estimates, expectations, intentions, and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain of the business issues and risks. A change in any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Please note this event is being recorded. I would now like to turn the conference over to Jessica Greiner, Vice President of Investor Relations and Communications. Please go ahead.

Thank you, Kate 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 rescheduled fourth quarter 2020 financial results conference call, following the weather-related events affecting Texas and surrounding areas last week. Our prepared remarks will include comments from 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 refer to a few slides highlighting key points of discussions. The supplemental materials are accessible on our IR website at www.trin.net. These slides can be found under the Events & Presentations portion of the site along with the fourth quarter earnings call event link. They are also available live during the webcast. It is now my pleasure to turn the call over to Jean.

Thank you, Jessica and good morning everyone. I'd like to start today on slide three and pick up where we left off at our Investor Day in November last year. We laid out our strategy for Trinity's Rail platform to deliver premier financial performance and deploy capital to drive value creation. 2020 was a year of extraordinary change for Trinity. Affecting this change to evolve into a cash flow and returns-focused company during a global pandemic was all the more challenging. But our team pulled together and made difficult decisions that have put Trinity on the path to accelerate our financial performance. I want to commend our people for their commitment to the company, to each other, and to our customers and all our stakeholders. To begin my remarks, I believe there are several highlights from our fourth quarter and fiscal year 2020 performance that position us very well for the future. First, we've aligned our business under a core purpose and laid out our strategy for improving the company's returns. The strategic initiatives focused on optimizing our business structure and growing our product and service offerings to advance modal share for the railcar industry. Second, in line with the strategy, Trinity completed the vast majority of our planned restructuring efforts during 2020. We also made further progress on leveraging Trinity's balance sheet under our targeted capital structure. We expect to make additional progress in lowering our overall cost structure in 2021. Third, Trinity's rail platform proved resilient during the unprecedented market events of COVID-19, generating strong cash flow from operations. And finally, there is potential to return additional capital to shareholders given the attractive cash flow profile of our business and the enhanced capital allocation framework we laid out at our Investor Day. We are very excited about our…

Thank you, Jean, and good morning, everyone. As Jean noted, Trinity's fourth quarter represents the continuation of lower railcar demand brought on by the COVID-19 pandemic. Additionally, our fourth quarter operating results were impacted by a number of one-time items. These adjustments primarily relate to the effect of the pension plan settlement as well as later-stage restructuring activities, including write-downs to manufacturing-related assets. We also had a benefit from our final 2020 income tax provision, as a result of tax law changes in 2020. Starting with the income statement portion of slide 9, total revenues and adjusted earnings reflect a challenging RevPAR market with declining railcar deliveries and softer pricing. At these lower levels of manufacturing earnings, timing of railcar sales and fluctuations in lease and operations and legal and administrative expense have had varying impacts on our earnings results. During the fourth quarter, Trinity incurred two impairment charges related to restructuring efforts and other market-related factors. The first charge was a non-cash write-down relating to existing maintenance facilities that did not fit our operational strategy or cost profile and have been classified as assets held for sale. Our maintenance business has realigned its operational approach to focus on large full-service railcar maintenance facilities, thereby providing better and more timely service to trace railcar lease fleet and our strategic customers. The second charge was a write-off associated with an investment in emerging technology for advanced steel materials, where the third-party was unable to secure adequate funding that is in the process of liquidating. Moving to our cash flow. Total cash from operations during 2020 improved year-over-year as a result of the cash flow synergies of Trinity's rail platform, as well as the countercyclical effects of working capital from our balance sheet. Trinity generated approximately $652 million in cash flow from…

[Operator Instructions] The first question comes from Justin Long of Stephens. Please go ahead.

Thanks and good morning. So Jean, maybe to start with something I think you said on Rail Group margins. I believe you said, second half margins would be better year-over-year versus the second half of 2020. I wanted to one just make sure that I heard that correctly. And maybe if there's any additional color you can provide around the quarterly cadence? In the first half, you mentioned some cost pressures, the cost saves not really kicking in until later in the year. So, maybe you could give us some perspective on how margins should flow versus what we saw in the fourth quarter?

Sure. Thanks Justin for the question. So, when you look at the real product segment, what we have seen is the headwinds on very competitive pricing out in the market. And then also the abundance of railcars have been out in the market available to put to use. Remember that we switched to making sure that we utilize our existing fleet before we go and add new cars into that fleet. My comments in the prepared remarks were that the first quarter, we expect to see some headwinds and that is still some decline in the volumes. We still have some headcount reductions going on. And we still have our Midwest facility coming up to speed. But the second half of the year, we expect to see results of our initiatives that we have underway putting us positive. And that I said we would expect the Rail segment margins year-over-year to improve.

Okay. But to clarify that was just for the second half and not for the full year?

No, for the full year, we would expect the Rail segment margins to improve.

Okay. Perfect. And then second question is on the operating cash flow guidance. Maybe Eric this is for you. I was wondering if you could update us on the CARES Act money that you're expecting in 2021. And is that factored into this operating cash flow guidance? And then maybe you could talk about what you're anticipating from a working capital standpoint as well?

Yes, Justin, this is Eric. So, as I mentioned in my prepared remarks, the -- we received our 2018 return $62 million. We had expected at our Investor Day when we were talking about the 2019 return we expected that to be received in 2020. It was not -- that's about $245 million, so that is now in that cash flow from operations number that I've given you. Based on the timing of the 2019 refund, the 2020 refund which is about $190 million is not -- we are not including that in our cash flow projections for 2021. Basically we had a slide at -- we slid 2019 into 2021 and we'll slide 2020 into 2021 or 2022. And then in terms of working capital, we got a significant pickup from working capital in 2020. I would not expect that same type of benefit this year as most of that has flowed through in 2020 already. So, we're not anticipating big pickups from working capital.

Okay, that’s helpful. I appreciate the time.

Thank you.

Thank you.

The next question is from Allison Poliniak of Wells Fargo. Please go ahead.

Hi good morning. Just want to follow along Justin's comments -- or question around margins. You've certainly taken a lot of structural cost out of the business model here, is there a framework to think about incremental margins here as we hopefully start to move towards a recovery?

Sure Allison. I'll start on that. If you saw the investor deck on page 18, we talked about the manufacturing margin and how we were going to lower the breakeven by 30% and you should expect the margin improvement over the three years to improve from three to -- by three to 5.5 basis points. So, we are executing on that. The timing of that's going to vary. It's really hard to say quarter-over-quarter or year-over-year because most of those initiatives were multiyear projects. We have in 2020 made a big down payment by resetting our overall cost structure and we'll continue to update you as we complete these initiatives.

Okay, great. And then within -- your lease rate trends have been positive. Obviously, we've been seeing the industry storage level come in. I don't know Eric, if this is one for you or Jean. Just any perspective on how you think that starts to evolve. Is there sort of key areas that we should be looking for in terms of driving demand at least to sort of a replacement level? I guess do you feel like we're getting closer to that actual bottom where we could see a greater inflection? It sounded like that based on your comments.

Sure. So I'll go ahead and start that Allison. If you're looking at the North American carloads, year-to-date carloads are down about 2.3%. Traffic is up 3.3%. And looking in those areas that have the price spots the chemical and agricultural are the best or the most accretive to us. We still have some headwinds with petro frac and the coal markets. The other thing though that's playing into this is attrition. I mentioned in the prepared remarks, there's been about 51,000 railcars that were scrapped last year. That's in the areas that have the older or the aged fleet that says the hoppers and the gondolas, covered hoppers and boxcars. Now the rate of scrapping increased as a year went on. And I think as long as the scrap prices remain high that you're going to continue to see a higher level of scrapping.

Got it. And I guess we're hearing scrapping and it's coming down. I guess if -- in the order increase that you're receiving, are you starting to sense an appetite for replacement demand at this point?

So I mentioned again in the prepared remarks that we have a lot more inquiries year-over-year. And that's great to see that. What we haven't seen yet is everyone translating those into orders. So inquiries are up. They're in the markets that we talked about. You can look at those with high utilization, low cars and storage. And those that have the higher scrap rates over the demand is definitely picking up.

Okay. Excellent.

And Allison, I want to make sure I understood. What did you say was going down?

Well just the idle cars the storage number. Obviously, you're getting scrappage and just sort of where we could expect that inflection on replacement.

Thanks.

Got it. Thanks. I'll pass it along.

The next question is from Gordon Johnson of GLJ. Please go ahead.

Hey, guys. Thanks for the questions. Just a few on my end. Can you tell me how much of the operating cash flow was from the onetime tax refund i.e. the CARES Act?

Yes. Gordon that was as I mentioned we -- in 2020 it was $62 million that we received -- of our cash flow that would have hit into cash from operations.

Okay. Sorry, if you said that. I didn't catch that. Sorry about that.

No problem. No, no problem.

Yeah. No problem. And then with respect to the FLRD, this seems like a new metric. What's the significance of this? And how is it balanced with the utilization rate which was down a little bit I think this quarter?

So this FLRD was -- we showed that at the Investor Day. The purpose of that was to give you a forward look. Some of the things to think about for the FLRD is one our comps are getting both year-over-year which is good. We've seen the lease rates in the market stabilize and improve slightly on a sequential basis. If current market pricing holds, we would expect FLRD to improve in 2021 given our current year of portfolio renewals have that easier comp. And we plan on providing the FLRD on a quarterly basis to you. So we think it will help you as far as you're modeling going forward and what to expect from us either tailwinds or headwinds.

And Gordon, this is Jessica. Just for additional context when -- we did provide that future lease rate differential for the first time relative to Q3 of 2020 in the supplemental materials we have given in our one year look back so you can see how that metric has trended over the last 12 months.

Okay. Thanks. That's really helpful. And then with respect to the backlog, can you guys give us any indication of how much you expect to realize this year? And if that's at all front or back end loaded?

Sure. I'll go ahead and I'll start on that Gordon. Right now we expect 60% of our backlog, current backlog to deliver in 2021 and we'll see what other orders come in during the year.

Okay 60%. Okay. That's helpful. And then I guess I got a lot. One more if I could. So this is a more broad -- more general question. It seems like there could potentially be -- there's some thoughts out there that we could be entering into somewhat of a commodity -- long-term commodity super cycle. Maybe that's right, maybe that's wrong. But if that is indeed right could you guys talk about how that may affect your business this year and kind of over the next couple of years? Thanks for the question, guys.

You bet. Gordon, this is Eric Marchetto. So if we are we're not -- let me -- one thing that you directly see and we're already seeing that now as higher steel costs. Higher steel cost obviously the big input on new railcar prices. So that could have -- if we -- if your premise is correct and we hit a commodity super cycle then that would make certainly asset prices new railcars increase. Obviously, that may dampen some appetite for railcars, but the railcars and the margin that gets built would be more expensive. That would have a positive lease rate increase and that would provide more of a lift to existing car rates more of an opportunity for those existing car rates to move. On the -- more on the supply side, if we're in commodity super cycle a lot of commodities move by rail whether that's for domestic use or exports. And so that would certainly have an impact on the demand side. It kind of depends on where it goes, but I think generally deposit...

Is there any impact from the Keystone pipeline shutting down in your business? Is that positive or negative?

I would call it neutral at this point. There wasn't a -- there hasn't -- that pipeline has an existed so the demand has been there on the margin. It should be slightly positive, but we haven't seen that yet.

All right. Thanks guys. Thank you.

Thank you.

The next question is from Bascome Majors of Susquehanna. Please go ahead.

Yes, thanks for taking my questions. Eric to follow-up on Justin's question kind of digging into the cash flow guidance, could you just clarify or share maybe a range for cash interest in there? And any other book-to-cash reconciling items that could be lumpy besides the refund quantification? Thanks.

So by asking if you -- I just want to clarify are you talking to interest income interest expense I'm sorry?

Interest expense in the operating cash. Just framing cash interest?

So that would not be -- well it would be in the income. Our debt balances haven't really changed that much. And so it should be relatively stable. As we talked about you'll see in our -- when we release our K later today. We've had a little bit of a pickup from lower interest rates it's offset by marginally higher debt balances. So year-over-year I would expect not a big change in interest income -- or sorry, I keep saying income interest expense in the numbers. But you'll see that as we when we when you dig into the K.

Any other book-to-cash reconciling items that could be a little lumpy?

In that number there's always some lumpiness, but mainly the big components of it are going to be depreciation and amortization which is a big number. And then I mentioned some modest working capital. And then you guys -- the tax receivable certainly the $189 million. That's kind of the bigger item of the depreciation and amortization.

Thanks for that. There were some earlier comments about taking some of the cyclical savings in the manufacturing business and then becoming more permanent this year. Can you talk about perhaps the long-term footprint of that business once we get through this cyclical challenging time? And how captive that manufacturing business is expected to be longer term to your leasing business versus selling to third parties? And is that mix expected to change? Thank you.

Sure. When you look at it, we don't expect the change in our business model. We think there's a lot of synergies that play out. Last year we did have a lot of resetting of that manufacturing to make sure going forward, we could deliver on the margin improvements that we've talked about in Investor Day through that cycle. We're going to continue to do initiatives. Page 20 of the investor deck have what some of those initiatives are. And you can also look at page 50. It gives you an outline over the three years. I would say throughout the three-year cycle we will be making changes overall. We'll be looking at implementing the strategies that we have in place. And you should see the improvements show up through the years. I just can't give you the get timing for each one of them.

Understood. Thank you. And perhaps lastly here, I don't know if Jean or Eric wants to answer to this, but there certainly seems to be a public equity investor appetite for looking at backlog or long-cycle cyclical businesses on mid-cycle earnings and being willing to ascribe that valuation even at those aren't necessarily here this year or next. Do you think that's a useful way to look at Trinity's business with the changes that you're making from a valuation standpoint? And are you willing to, kind of, frame to investors what elusive hypothetical mid-cycle could look like with all the initiatives that you've got taking place?

During Investor Day, we tried to lay-out what we'd expect on the returns to a cycle on average. And I think that what you really need to look at as a business is we are transitioning to being lease-focused and having our new production and our maintenance facility support our overall business model. We don't expect to stop providing new products into third parties. We think that will help overall with the footprint that we have. But again our focus is utilize assets we have first then we'll put new products into our portfolio from there and we'll service those third parties.

And that -- we think our model will perform. We put out return projections and we think the platform the way it's configured with these businesses that we're going to be able to produce very attractive returns on equity.

Thank you, both.

Thank you.

Thanks.

Next question is from Matt Elkott of Cowen. Please go ahead.

Good morning. Thank you. Eric, I think, you said the 60% of the existing backlog is for delivery this year. Based on this and the current order and inquiry activity, which has not been translating into orders really as much as one would like. I guess, delivery this year could be materially lower than last year? Is that reasonable?

So -- this is Jean, sorry. If you look at the range..

Hi, Jean.

No problem. The range of delivery you saw this year it's from the low 20s to 40s right that's out there. If you look at existing backlog currently in the industry, realistically, it's probably towards the 20 level or mid-20s not to the 40s. There would have to be a lot of orders coming in very quickly because it takes three months to six months for those orders once received to translate into the production.

But you still feel -- even if deliveries are lower for you guys this year you still feel confident about growing the operating -- the manufacturing margin?

We do. We've got a lot of levers in our hands that we can pull. And it's just incumbent on us implementing successfully those initiatives.

It's all why we're trying to lower the breakeven point, right? And it should -- it will start to realize it as we produce our results throughout the year.

Got it. That's helpful. And Eric, can you elaborate on your comment that railcar securitization market that it's been at historically favorable levels? I think -- what are the drivers behind that? And what it could mean for you guys this year?

I mean -- simply I'm saying the -- we accessed the securitization market for about $500 million last year and with a lot than we did in the fourth quarter. As we look -- as others have entered the market this year investors -- those investors are looking for yield and RevPAR assets provide an attractive risk-adjusted yield to them. And so -- and that is driving -- driven spreads down coupled with low benchmarks. So that's why we're seeing the financing that we're doing. And where -- what it means for us this year. I think when we access the markets, I think they'll be favorable and we will continue to lower our cost of capital.

Okay. And during certain phases in the past decade or so, there have been interest by financial investors and railcar assets looking for yield from domestically and then from Europe and from Japan. What are -- what's the kind of investor profile you're seeing now? Is it all of the above, or does there -- is there any region that stands out where people maybe are starting to look at North American railcar assets?

Yes. I think when you look back over the last decade or so, we've certainly seen new entrants coming to the market and look for -- invest in railcars. Some of those have slowed in their interest. Others have increased their interest. It kind of depends on where their exposures are. But we still see interest from investors that have yet participated in the market that are interested in coming into the market and -- for those same reasons. They like the risk-adjusted yields of the railcar leases. They like the diversity. They like the inflation hedge potential of the assets. And so we're still seeing that appetite from investors.

Okay. Got it. And Jean one last question. You mentioned that the inquiry activity has picked up significantly recently, but the translation into orders has not really happened yet. Any reason or theory you guys have about why people are not pulling the trigger yet?

So when you look at it, it's really still too early and the fuel pricing going up is causing some to hesitate. I think as you continue to see the availability of existing railcars out there showing or getting tighter, you'll see that pick up. The other thing is uncertainty when you look at COVID-19, when you look at the fact that we still need to get a lot of people vaccinated then you look at the economic recovery from manufacturing. We've had some supply issues disruptions there especially in the automotive that's occurred. So all of that's weighing in, in people being uncertain and hesitating.

Okay. And just finally did you guys quantify the magnitude of the lease rate improvement in the fourth quarter?

So if you saw the investor deck the -- what we gave you from the third quarter was 21% negative. And for the fourth quarter, it was minus 13.6%. So inflection point it started coming back up. And as I mentioned earlier, there are signs that indicate, it will continue to improve this year.

Great. Thank you very much.

Thank you.

And the last question today will be from Steve Barger of KeyBanc. Please go ahead.

Thanks. Good morning.

Good morning.

If I try and frame up everything you've said about opportunities and headwinds, it sounds like you think earnings can improve in 2021, but you don't expect a significant step-up, like 2021 is more of a stabilizing year. Is that fair?

We're trying to -- we've given you qualitative guidance. And I don't want to turn into quantitative guidance. So, just suffice it to say, we see it improving. You did hear that, we don't see industry deliveries being a big catalyst for improvement. It's more of a -- it's more of the self-help cost profile changes that we're making. And then, hopefully, we'll start to see demand pick up later in the year.

Understood. As you've modeled out organic lease revenue, based on sequential changes in traffic and utilization rates, care to take a shot at what quarter you expect follow RD could go positive in 2021?

No. We're not going to guess on that. So like I said, we expect improvement to continue based off of the great shoots we're already seeing. But we'll provide that guidance on a quarterly basis. And you'll be able to see that trend.

Okay. And one last just kind of modeling question. Based on pipeline, as you take orders for delivery this year, do you expect a nice change in mix, or is the revenue per current backlog that you have right now a good way to think about delivery mix for 2021?

So in 2021, I would expect that the freight cars will pick up first. That's where the demand is higher currently and where there's, less cars available. And that you would see tank cars lag that recovery.

Got it. Okay. And can you talk more about Trinsight? How does that generate revenue? What is the benefit to the customer? And how long before that becomes material?

So from our Investor Day, we talked about the fact that we're going to see growth there. We think it's valuable to our customers. We are already seeing revenue. We're seeing a lot of interest in having a lot of discussions. It provides them data on. Where the car is? The health of that car and it can also provide them information to look at the cargo, that's there safety implications. So a lot of positives for them, those discussions are going well, but we expected modest growth during this three-year planning period.

And so maybe I didn't understand is Trinsight a part of rail pulse? Are those two separate things? How do they relate?

They are separate. So rail pulse to the industry initiative, we are a big player in that. But Trinsight is our own internal information that we have from our rail platform. That we are using to help our customers overall with their supply chain.

And what's different about rail pulse then that's exclusive of what you just said about Trinsight?

So first rail pulse was really just kicking off, so it's behind where we are on Trinsight. The other thing is we rail pulse have set the standards for the industry overall. We're a player in there so we can help -- have those discussions and make sure that we're involved for that.

Got it. Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Jessica Greiner for closing remarks.

Thank you, Kate. A replay of today's call will be available after 10:30 a.m. Eastern Standard Time, through midnight on March 3rd, 2021. The replay number is 877-344-7529 with an access code of 101-513-60. A replay of the webcast will also be available under the Events & Presentations page on our Investor Relations 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.