Good day and welcome to the Trinity Industries' First Quarter 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] Please note today's event is being recorded. 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. I would now like to turn the conference over to Jessica Greiner, Vice President of Investor Relations and Communications. Please go ahead, ma'am.

Thank you, Rocco, 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 first quarter 2021 financial results conference call. 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 reference slides highlighting key points of discussions as well as certain non-GAAP financial metrics. The reconciliation of the non-GAAP metrics are provided in the Appendix of our supplemental slides. 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 first 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.

Thank you, Jessica. And good morning to everyone joining us today. I hope everyone is staying healthy and looking forward to a brighter summer in the year ahead. We certainly are, and are increasingly encouraged by the improving trends for our business and the economy as a whole. While the railcar market is showing signs of recovery in 2021, we are focused on the execution of strategic initiatives that are more within our control to position the company for an acceleration in our financial performance. Many of which were detailed either Investor Day last winter as part of our three-year strategic plan. To highlight the key themes from the first quarter, Trinity's results reflect the initial impact of implementing certain of these project initiatives on top of challenging pricing and declining volumes, given the lower order volumes last year. Additionally, two significant weather events affected our productivity in the quarter. One of which will have a lingering impact on our business in the second quarter. Even so, I'm pleased with our progress toward the goals we laid out at our Investor Day and the tremendous effort our teams have put forth. We feel very good about how we are positioning our business for recovery and the embedded value we are creating in the platform for long-term performance. While earnings were low given the reasons I just stated, Trinity's Rail platforms still generate a healthy level of cash flow in the first quarter. We also believe the investments made during the quarter align with our capital allocation framework for curating long-term shareholder value. Let's me turn now to Slide 4 and review our results. As I mentioned in my opening, we believe the railcar market is early in its recovery from the pandemic-related headwinds of 2020. However, our first quarter financials…

Thank you, Jean. And good morning, everyone. I'll start with the financial summary on Slide 8, and provide a few more details. Trinity's first quarter results are combination of the challenging post-pandemic market environment, and our efforts to position the business for an acceleration in financial performance. While the earnings results are lower than the first quarter of 2020, we believe we're making the necessary changes for improved profitability in 2021. And as Jean said, we're seeing green shoots from our efforts within the business. Jean has highlighted several business drivers of our financial performance, including lower overall deliveries and challenging lease and new car pricing compared to prior quarters. During the quarter, our earnings results were impacted by approximately $4 million of direct costs in lost production ton, associated with two distinct weather events. As we look through 2021, we expect modest earnings improvement in the next quarter, with further acceleration in the back half of the year, resulting in year-over-year earnings improvement in 2021. In regards to cash flow, first quarter cash flow from operations primarily reflects the lower level of operating income. Our working capital was substantially unchanged during the first quarter, resulting in $70 million in operating cash flow for the period. For 2021, we continue to expect cash flow from operations of between $625 million and $675 million. Our investments in the quarter included approximately $108 million in leasing CapEx for new railcars and betterments and $9 million in manufacturing CapEx following the completion of our Midwest maintenance facility. For the year, our expectation for net leasing CapEx and manufacturing CapEx remains the same at $300 million to $350 million and $45 million to $60 million respectively. We anticipate completing additional portfolio sales from the fleet during 2021 as we execute on our initiative to…

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Allison Poliniak with Wells Fargo. Please go ahead.

Hi, good morning. Just want to talk about, really positive comments in terms of the railcar builds in '22, sort of reaching that replacement level. And I understand you're not giving a specific car guidance, but any thoughts on how you guys are viewing that cadence? Is it the stronger inflection in the second half that we could see this year? Or is it more of a gradual building your perspective? Just in general from overall thoughts.

Okay. Well, thanks, Alison. As we look at the trends that we're seeing into the second half, we believe those will continue. It's a combination of supply and demand. Last year, we had over 50,000 cars that were traded out of the industry. And we're expecting to see 50,000, or maybe a little bit more trade out this year based off the run-rate from the first quarter. So if you look at those dynamics, you would expect to see higher pickup. One thing I do want to point out is, in this recovery, the mix of car types is much different than in the last one. So freight cars are coming back much quicker than the tank cars. And so that just a little nuance into what we're seeing.

Got it. That's helpful. And then you had mentioned margin and rail products improving throughout the quarter. Any color you can bribe to help us understand that exit rate? And then I guess in line with that, you've continued to do some headcount reductions there. Should we anticipate that to stabilize here going forward?

Sure. Thanks, Alison. So when you're looking at the headcount - I'll start there, you should expect to see that to start to stabilize as we've gotten the headcount ready or in place for the demand that we had for the first part of the year. And we have said that we would expect to see the demand increase through the second half. So you might see a little bit of a change there on what's going to happen. So it maybe basically in line for right now. If you look at the margins, a couple of things to look at there. We have been actively taking actions. We talked about the improvements we were going to make in both the outsourcing some of the lower value-added fabrications, that is starting to take hold. We have done some initiatives with supply chain overall, where possible to lower cost of inputs materials coming in, that's where building the steel prices. As you know, that is going up and going in the wrong direction there. But we've also spent time on automation in lean events within our factories. We're starting to see that pull through with better efficiencies coming out of the factory. So all of that coming to fruition gave us a better run rate coming out of the quarter that we see sustaining through the year.

Perfect, thanks. I'll pass it along.

And our next question today comes from Matt Elkott with Cowen. Please go ahead.

Good morning. Thank you. Jean and Eric, could you guys say what's your definition of replacement demand? Is it 35,000-40,000?

So as you're looking at anywhere between 40,000 and 50,000 cars is what we would say replacement demand is.

Okay, got it. And, Eric, I think you mentioned year-over-year improvement this year in earnings. Can you help us just knowing that benefit? Is it modest improvement, is it meaningful improvement?

Okay. Matt this is Eric. So we did say we're going to have improvement. We do not put any other adjectives around it, besides there was improvement year-over-year. But when you look at where we are in the first quarter, obviously it was low. Jean commented we expect things to get modestly better in the second quarter and really more back-end weighted. So I think that's what we expect and that's what you can expect to see from us.

Got it. And then maybe a bigger picture or longer-term question about the manufacturing footprint right-sizing. You guys have been doing that for a while now. And we did some more this quarter. And I believe that you're not ruling out even more in the future. How much of this is due to the current weak environment? And how much of it is long-term strategic, meaning maybe not coming back? And if we take three to five-year view, what will the company as a whole look like from a manufacturing perspective? Are we talking about a much smaller manufacturing footprint that's - they're in large part to support leasing? Or can we expect you guys to move back up as a percentage of the manufacturing backlog to the 40% plus that you once had, as recently as a couple of years ago?

Matt, I'll start on that. And then will hand it over to Eric if he wants to add anything. So when you look at our manufacturing footprint, one thing that I want to point out is some of the properties that we're selling have been not utilized. So they were there for potential future growth or other types of businesses. We're cleaning those up. And we still have numerous facilities left that fall into that category. So when we talk about selling those types of properties, that's what I'm talking about for the next few years. When we look at demands in the industry, and what we're setting up for, we really think that the industry will be at industry or replacement levels through possibly 2024. So we would make sure that we're sizing for that type of environment and what we believe our share is. And then the next part of it is, even as we have taken some of our capacity, alter offline, we've also taken some of the work outside. Those lower value-added fabrications going outside, opens up floor space in existing buildings that would actually allow us to produce more cars. We would just be doing more of the high-value add and assembly in our facilities. Hopefully that answers your question.

That's very helpful. Thank you very much.

Thank you. Next question comes from Gordon Johnson with GLJ Research. Please go ahead.

Hey, guys, thanks for taking the question. I guess, on the operating cash flow, the guidance for the year is a bit higher than what we see in the first quarter. Is there anything out of - it seems like what you guys are expecting improvement of business in the back half. Anything additional to that, that you guys are doing that's going to help that cash flow number that we should know about?

Yes, Gordon. And I didn't point out today, but I have the point - this is Eric, have pointed out previously. Recall, we have a rather large tax receivable on our balance sheet. And we're expecting at least the portion related to our 2019 tax year to come into this year. And that's approximately $245 million. So that will flow through our operating cash flow number when that receivable is converted to cash. So that's the other piece of it. The other piece you're going to see is, obviously our cash flow as our earnings improves, then we would also expect our cash flow from operations to improve.

Okay, that's really helpful. And then, we expect that some of our other industrial sectors for things improve in the back half and it seems like you guys do too. Is there something that we should look to a metric? Maybe something out of the ordinary, or maybe something in the ordinary, we should look to I guess, just kind of gauge how things are trending versus your expectations?

So the normal metrics that you look at, as far as carloads that you're seeing. Overtime, what you're seeing for the industry production rates that are going on. Overall signs that the economy is opening back up, will all lead to good recovery or potential recovery for rail industry.

Yeah. Gordon, the weekly railcar loadings are a great indicator of the health of our industry. And so that's the beauty of it is. You get that real-time information every week. And so, if there's one metric that I point you to for our industry is going to be that one.

Excellent. Hey, thanks a lot for the question is guys.

Thank you, Gordon.

Thank you.

And our next question today comes from Justin Long with Stephens Inc. Please go ahead.

Hey, good morning. This is George Sellers on for Justin Long. So I guess to start on your long-term ROE target, it sounds like the replacement demand levels for railcars that you're expecting to reach in two-years are a little bit lower than maybe what you were expecting when you gave that longer term ROE target. So just wondering if there's anything that's changed with the timeline there.

So George, this is Eric. Let me just - I would say that generally speaking from what we said last November, when we at our Investor Day, that our outlook for the industry really hasn't changed. It's kind of moving as we would have expected. So that longer term goal - that 11%- 13% goal that's out there that still remains. We talked about that being a replacement level demand over the cycle. Obviously, this year is a bit below replacement cycle, or we would expect it to be and then getting back for replacement levels. So without splitting hairs, I would say that the level of - nothing has really changed for our industry outlook over the near term.

Gotcha. Okay, that's helpful. And then could you give us an update on the secondary market for railcars in terms of like, where valuations are, and just the level of activity there?

So the secondary market is better than it was last year, definitely more robust. As you saw, we had a small deal in the first quarter. And remember, we can be both a buyer and a seller in this market and continue to look. I think it's strong and will remain strong through the year.

Okay, great. I'll leave with that. Thank you all.

Thank you.

And the next question comes from Bascome Majors with Susquehanna. Please go ahead.

Yeah. Thanks for taking my question. Wanted to dig into the encouraging commentary on the inquiry levels and what sounds like maybe some increased conviction that the manufacturing market will recover towards mid-cycle levels next year. You've just taken down capacity, labor markets have been challenging in a lot of industries here. Cost and materials and steel and beyond and just general supply chains have been kind of gummed up in a lot of industries as well. Can you talk about the conviction that, when your customers want the cars that you'll be able to ramp that capacity back up the 50% to 100%, you would need to get the mid-cycle? How you're confident that you'll be able to deliver kind of a historical trading margin as you get to that run-rate? Thank you.

Okay. Well, I'll go ahead and start on that one. When you look at our management team, they are very strong and experienced. And they've gone through these cycles, many times. And they're really capable of reacting very quickly to the change in demand. And what we shuttered or idled facilities, we're offsetting with efficiencies, enhance supply chain, some of that outsourcing of those low value-added fabrications. So that also helps us. The ability to ramp up production is more dictated by the ability to get the labor force in. It's not the manufacturing space. We're fortunate that we have very qualified people in the plants. We have our own welding schools inside of our own plants. So if we need to go in and bring new people into the industry, and train them, we have that capability. So we're feeling pretty comfortable with our ability to ramp up for the demand.

And thank you for that. And just one more, on the capital allocation. You talked about the returns-based approach, you talked about your near-term priorities. With the stock at 28 to 30 bucks instead of in the low-20s, can you give us some thoughts on how you prioritize the buyback versus the dividend on a go-forward basis? And maybe beyond that, we've talked a little bit about acquisitions and your core North American railcar market. Is there an opportunity to maybe be a railcar owner in some overseas markets that may offer some more growth mid-term? Thank you.

Thanks, Bascome, this is Eric. So when you get into capital allocation, obviously, it is dynamic. Our share price has changed from last year, it's improved quite a bit. And so that certainly does change the equation, but so of the returns and everything else that we expect going forward. So, it's a very dynamic process. We look at each investment decision. And in the end, we choose what's the highest return. And when you look at what we have ahead of us, and what were opportunities are? If you'd expect acquisitions, dividends, share buybacks, you're going to see a combination of all those things from us. And in the end, we're going to do right for the shareholder.

And on the idea of potentially investing capital in overseas railcar markets, whether it be Europe or India or somewhere else. Just any thoughts on whether that's in the potential decision tree is as you generate cash going forward?

Sure, Bascome. I'll take, this is Jean. So we are looking at M&A in different areas. And we will also look for markets that can provide the returns that we need or we're expecting in our business. So have we considered or will we consider in the future? Yes. We just have to again find the right market and the right price to be able to enter into some of those.

Thank you.

Thanks.

And our question today comes from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Thanks. Good morning. Can you go back to your comments on steel prices and supply chain constraints? Did you say the current backlog could have some margin pressure due to steel prices?

What I was talking about on the steel prices is we do a lot of different actions to mitigate any of those pricing headwinds. There could be something that comes up that we're unaware of that may cause some pressure. But for the most part, we are covered in our mitigation efforts for orders that we have in place.

But you do think that higher steel prices, if they were to persist could cause some demand destruction?

We do. So customers have been already delaying making some decisions. We think some will continue to delay until they have more confidence in their business and where it is in the recovery. But as you look at that, steel prices and our new car production, even though it ranges depending on the type of the car has gone up 10% to 20% for a car. So that does change the dynamics and the decision-making. So where you're going to see people placing orders are those that do have cars that are available anymore for them to take and use, they're going to have to buy new.

And Steve, when we said, that that will make existing railcar assets more attractive. That's one of the things we like about our platform. The demand goes through our existing fleet, and then to the new manufacturing builds. And so that will leave our existing - that will leave existing assets a little more room to run in terms of increased lease rates, because the replacement costs have gone up. And so we see that. We expect to see that in the future. And that's why we're confident in our outlook.

Makes sense. And just in terms of supply chain, I think he said something about component prices. Any comments on price and availability from a disruption standpoint?

We've been very fortunate throughout this pandemic. We've had very few if any supply disruptions. Most of our supply chain is in North America, so above 90%. So we have been experiencing the same disruptions others may have.

And are you protected contractually on manufactured components that go into your railcar production?

So just like other businesses, you have escalation clauses in there sometimes for the changes in material input costs. And so that's where we talk about our contracts, we also pass those through to make sure that there's coverage.

Yeah. For especially components, that's generally comes through when we call scrap surcharges and their contracts that contemplate those.

Got it. And last one for me. I know you've been really focused on digital platforms and data analytics. In the Analyst Day, you've talked about a $20 billion to $25 billion addressable market opportunity for those services. Any update on how that platform or how those commercial initiatives are coming along? And maybe any early read on trend site?

I'll go ahead and take that one. So I mentioned in my prepared remarks that we were seeing more and more customer interest. Most of the time, the customer now is bringing that up in our conversations when we're talking to them about their needs. We have approximately 50 customers right now who are in process of going into pilot stages for these. And we've seen an increase in the number of cars that are already paid, we're coming on to that platform. So it's still the beginning. It's still initial results, but very favorable recognition from the customer and demand from them.

Got it. Thank you.

Thank you.

And our next question today comes from Barry Haimes with Sage Asset Management. Please go ahead.

Thanks so much. I had a couple questions here. One is, I think you mentioned that the FLRD was down 14.8% in the quarter, in part due to a tough comp on cars coming off-lease. Could you talk about how that comp works for the second, third and fourth quarter so as we go through the year? Does that comp stay at similar level or just to start to get a little bit easier? That's the first question.

Okay. So remember, our FLRD is the forward-looking rate for the next 12 months that we're seeing based off of the renewals that we've had recently. But let me talk a little bit about lease rates and see if I answer the question. So remember, there's many different markets, and they're all recovering at different rates. 40% of our markets are seeing sequential increases in rates already. Other markets still have cars and storage, and availability from other lessors. Those will continue to have rate pressures until they're put back into service. Scrapping plays a role in this. So if you're scrapping 50,000 plus cars a year, the demand - supply and demand metrics will give you higher lease rates. So what we're seeing is that everything that underpins that lease rate is trending in the right direction.

Got it. Okay. Let me follow up and ask one related question, to maybe try to give a little bit more clarity. If you could take one or two of the car types, perhaps that are striving to get better. Could you talk about where the lease rate would have been at the end of the year where it is now? But more importantly, with the higher price of steel, where the lease rate would need to be for you guys to build a car and put it into lease fleet? So theoretically, where does it have to get to justify newbuilds if you will?

So, in terms of car types, where you've seen improvement. Generally, I'm not going to get into a lot of details on different car types. But generally, we've seen a little more as the slack has tightened on the freight car side, specifically cover hoppers for grain and agricultural products. We've seen a little more tightening there and less so on some of the tank cars - on the tight side, specifically, energy-related tank cars. There's still excess railcars serving those markets. Getting into your question on, what does investable levels? So Jean mentioned 10% to 20%, material cost increases. That statement with no other changes would mean lease rates would need to go up 10% to 20%. I'm not saying we've seen lease rates go up by 10% to 20%, but that's fundamentally if you're going to hold the same hurdle rate on your investment than they would need to go up. And that's why we think the existing car rates will come up, because the alternative is invested in a new railcar. A new railcar, oftentimes provides a ceiling on lease rates for existing railcars, they have similar utility. And so those investment - those capital costs on the new railcars going up will give lease rates a little room to run. And so that takes time. It doesn't - the market is not perfectly efficient. So that doesn't just happen at once. Information in our market is less than perfect. And so as people start to see that over the next quarter, two quarters, maybe even three quarters, you'll start to see that trend pick up and continue.

Thanks. That's very helpful. One more very quick one. What is steel, as a percentage cost to good sold for you guys, approximately?

We really don't get into a lot of detail on that. Obviously, when you look at - there's different types of steel, we have steel plate, steel coil, and all of our components. All of our components are generally steel which your cast products. So when we're talking steel in turn, today, we're talking more about the raw steel go in coil steel, and plate steel. When you get into the overall - all the componentry in a railcar, then basically the material cost or entire railcar is steel. So, the only other point on that is our labor and overhead feat. So when you put all of it together, it's a very high mix. When you just look at the coil steel and the plate steel, then it's well under - it's probably more - it's much lower than that.

Great, thanks very much.

Thank you.

And ladies and gentlemen this concludes our question-and-answer session. I'd like to turn the conference back over to Jessica Greiner, for any final remarks.

Thank you, Rocco. A replay of today's call will be available after 10:30 am Eastern Standard Time through midnight on April 29, 2021. The replay number is 877-344-7529 with an access code of 10152017. A replay of the webcast will also be available under the Events & Presentation 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.

Thank you, ma'am. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines. And have a wonderful day.