Good day, and welcome to the Trinity Industries Fourth Quarter and 12 Months Ended December 31, 2022 Results Conference Call. All participants will be in listen-only mode today. [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 would 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 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 fourth quarter 2022 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 discussion as well as certain non-GAAP financial metrics. The reconciliation of the non-GAAP metrics to comparable GAAP measures are provided in the appendix of the supplemental slides, which are accessible on our Investor Relations website at www.trin.net. These slides can be found under the Events and Presentations portion of the website along with the fourth quarter earnings conference call event link. A replay of today's call will be available after 10:30 A.M. Eastern Time through mid-night on February 28, 2023. Replay information is available under the Events & Presentations page on our Investor Relations website. It is now my pleasure to turn the call over to Jean.

Thank you, Leigh, and good morning, everyone. I hope your 2023 is off to a great start. Before we begin with our prepared remarks, I want to take a moment and acknowledge the accomplishments of 2022, but don't always appear on financial statements that are essential to all of our stakeholders. Our company purposes delivering goods for the good of all and then embedded in this purpose is our focus on environmental, social, and governance excellence. We have updated our operating model to embed the word sustainability as a core value further evidence that we view sustainability as a key focus for our business. Last year, we continued our efforts to ramp up our ESG initiatives as a company. This included naming a Global Head of ESG for Trinity to spearhead and lead our ESG initiatives. We became the first railcar manufacturing company in North America to certify that our existing EHS management system conforms to the international organization for standardizations, environmental standard and occupational health and safety standards. We hired a Direct to either DE&I initiatives, launched nine employee resource groups and employee networks, and completed our first ESG roadshow with investors. Additionally, in our core business, we are consistently working on new product development to support sustainability priorities. This includes improving efficiency in new railcar designs and programs like our sustainable conversion program that allow us to repurpose existing railcars and increase the longevity of their parts and components. To-date, our sustainable railcar conversion program has reused over 54 million pounds of steel. Our ESG initiatives are ongoing and I look forward to keeping you updated on our progress through the year. And now, turn with me to Slide 3 to talk about our key messages from today's call, which we will expand on later in our prepared…

Good morning, everyone. I would like to start by congratulating Jean on being named Railcar Women of the Year by the League of Railway Women for 2022. I would also like to give a little more color on the Holden acquisition that Jean mentioned. Holden is a manufacturer of market leading multi-level vehicle securement and protection systems, gravity-outlet gates, and gate accessories for freight rail in North America We purchased Holden for an initial purchase price of $70 million with another $10 million minimum to be paid in installments over the next two years. There is more information on this acquisition in our 10-K, which we expect to file later today. This acquisition fits well with our strategy to increase exposure to less cyclical and higher margin aftermarket parts, giving us more opportunities to serve our customers and diversify our revenue stream. Furthermore, as we see automobile preference move more toward SUVs and heavier electric vehicles, securement systems will become even more critical and we look forward to being a market leading shop provider and continue to provide the quality and service that Holden's customers have come to expect. We completed two acquisitions in 2022, Quasar and Holden. And are in the process of integrating both these operations into our platform. We see value in optimizing our business with strategic acquisitions and continue to look for the right opportunities, but remain selective in our evaluation of potential targets. If you turn to Slide 9, I'll start my comments with the income statement. In the fourth quarter, our consolidated revenue of $591 million improved sequentially and year-over-year due to higher external railcar deliveries and improved pricing. Our adjusted EPS of $0.44 per share in the quarter, also a sequential and year-over-year improvement benefited from $236 million in lease portfolio sales driving…

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from [indiscernible] Allison Poliniak with Wells Fargo. You may now go ahead.

Hi. Good morning.

Good morning.

Jean, I just want to go back to your comments on -- well, related to the lease side, storage levels still low, but they are ticking up. Just want to get a little bit more color on your side. Like, I know you mentioned seasonal, but is there any worry that we're actually seeing some incremental store because of some of the weakness out there? And then with that lease renewal success rate, what's a good range to think of as we look at '23? Thanks.

Okay. Well, thanks, Allison. When we look at 85% success rate on renewals, we haven't seen that since 2014. The market is still very tight out there. And so what we're seeing go into storage is more some of the seasonal not grain cars or not needing some grain cars, consumer side, there's a little bit of weakness there that type of car going in. So we expect the market to stay tight, especially as you look at overall what's going on or expected to happen with attrition and then the new railcars going back into the system.

Got it. And then within rail manufacturing, you highlighted a number of headwinds to the margin this past quarter. And just I'm trying to reconcile, you're looking for a sequential improvement there with deliveries remaining stable. Are you limiting sort of that capacity addition just because of the labor side that you're seeing? Just trying to understand what drives that margin higher here just with the level of deliveries at this point that you guys are indicating?

Great question. So when you look at it, some of the things that we've learned this past year is we've got a really strong backlog that allows us to have good visibility. We're extending the time or the view that we get to the supply base to be able to see that. We still have seen at the end of last year, I think we talked about it, fewer rail suppliers to provide product and they're still having issues. As we went into the fourth quarter, and want to ramp our production, their ability to deliver on time went down. So it went the opposite direction. They had stabilized at the lower run rate. So now they've got a good view for the year of what we need, and we're expecting them as the year goes on to get better at delivering on time. For us, we took some actions in the fourth quarter as far as labor goes, and we've seen that actually come back down, so get a little bit better on our ability to attract and then maintain or keep those employees. So we're not at the level of employees we need for the full year production yet, but we're getting a lot closer.

Great. Thank you.

Our next question will come from Matt Elkott with Cowen. You may now go ahead.

Good morning. Thank you. So at first glance, it looks like maybe you're expecting lower deliveries in 2023, but because the high end of your delivery guidance for the industry is lower and the low end is actually lower than the actual 2022 number. But then, Eric, based on the remarks you made, I think you mentioned you expect your share to be consistent with 2022 and I think that was 34%. So if I take the midpoint of your own -- of your delivery guidance for the industry, I'm coming up with just over 14,000 cars for '23, so that's up about 5%. Is that math okay?

No. Matt, sorry, if I wasn't clear. I talked about historical market share ranges so in that 30% to 40% range. So if you take the 40% to 45% and apply a 30% to 40%, then you'll get a band. And our deliveries will be up more than what you're -- it's more than what you're calculated?

So last year, remember, we had 5,000 cars delivered the first half and 8,000 in the second half. And I just said that we're not at the number of employees we need for the full year production to help you a little bit on where we're expecting to go.

Okay. Got it. That's helpful. And then my next question is, I know you had some benefits, I guess from storm recovery last year that affected the margins positively, but you also have the supply chain disruptions this year. Your deliveries were up year-over-year by 36%, but your margin was down. Can you help us understand how much was it -- how much was the storm recovery benefit part of that versus the supply chain disruption this quarter?

So the store benefit we adjusted out and so, that's the big difference between the $0.94 and the $1.02. And so -- and in the slides, there's more color in the rail segment around, especially in the quarters that those recoveries were received, you'll see that in their math. In terms of the headwinds outweighed the storm recoveries by a wide margin. Jean mentioned the 40 basis points in the fourth quarter that's -- that is much more than the storm recoveries.

Got it. And then just one last industry-related question. Do you guys foresee any potential changes to like Class II flammable liquid regulation when it comes to tank cars or any other type of cars similar to what we saw for crude regulations after Lake Megantic?

So there's a lot of discussion going on and a lot of phone calls. I think we got to wait for the NTSB to come out with their findings on what happened. But I would expect movement in some sort, either on safety, how they ensure that the trains are shaped going through on manifest sharing other things like that, but we'll have to wait and see. We're discussing right now.

Great. Thank you, Jean. Thanks, Eric.

Thanks.

Our next question will come from Justin Long with Stephens. You may now go ahead.

Thanks and good morning. I wanted to ask about Rail Product Group margins. Jean, it sounds like you expect to be in that high-single digit range by the time we exit this year. But can you help us think through the cadence of margins assumed in the guidance and how you expect that 400 basis point headwind you called out to fade over the course of the year?

So we're not giving quarterly guidance, but I will tell you that as Eric mentioned, we don't expect those headwinds to go away overnight. So we expect them to improve and go away throughout the year. So I would just say, take that into consideration as you're looking at the overall year or quarters.

And Eric, you did mention there would be some lumpiness, I think, in profitability. So is there any color you can give us around that comment as we think about modeling the quarters this year?

Yeah. I think, as Jean -- on the Rail segment side, you see -- Jean mentioned the improvement. The lumpiness would come more from eliminations and car sales. This year, more or fewer of our deliveries will go to the lease fleet this year, which will mean there's fewer, the investment in the fleet will be -- is in that $250 million to $350 million. But the car sales, especially when you think about the Wafra transaction, historically, we've done that in the second half of the year. This is year three and that three-year program agreement. And so there will be some lumpiness from the gains on sale.

Okay. And last question I had was on cash flow. I was curious, if you could share any expectation for 2023. I know there's some moving pieces with working capital that you mentioned? And also on the buyback with the new authorization, could you comment on what's getting factored into the EPS guidance for buybacks?

Yeah. So when you look at buyback specifically, we've returned a lot of capital to shareholders over the last few years, certainly, and we did finish our last authorization and started a new authorization in December. I would characterize our share buybacks this year in terms of -- based on the earnings guidance to be more opportunistic and modest in terms of the amount of capital we're returning via share buybacks. I think we just raised the dividend in the fourth quarter to $0.26 per quarter. So that more of our capital to shareholders will come through that mechanism, at least as we're sitting here today. And then, I'm sorry, the first part of your question was on cash flow.

Cash flow expectations.

Yeah. So when you go back to our three-year Investor Day plan, we lowered that last quarter slightly, the cat, we're still in that range with the items that happened in the fourth quarter and where we're sitting today, we're maybe in the lower range -- lower part of that range, but our cash looks like it -- this platform can generate a significant amount of cash, and we expect that to continue in 2023.

Okay. Great. Thanks for the time.

Yeah. Thank you.

[Operator Instructions] Our next question will come from Gordon Johnson with YOU’RE You may now go ahead.

Hey, guys. Thanks for taking the question. So maybe this one for Jean. Just taking a step back, looking at the U.S. economy. Looking at retail sales, the engine that drives the U.S. economy, now down three of the past four months, real disposable income saw the surplus fall in 2022 dating back to the 1930s Great Depression, real consumer spending on services was flat in December. Are there always monthly reading in nearly a year, real average weekly earnings are now down a record 21 months in a row. Auto sales growth slowed in January and 2022 was the worst in nearly a decade and home sales last year were the lowest since 2014. I know a lot of data points, but it just seems like we're taking that into account and also looking at Midwest region average truck rates or other delivery rates. It seems like things are looking pretty bad, not to sound too dire. But is the guidance you guys are giving back end loaded? And if it is, do you see some risk to that? And then a follow-up. Thanks.

Sure. So if you look at manufacturing stats, November and December had seen a tick down, but they just came back up in January. So we saw a bounce there. The consumer areas are absolutely the ones that are seeing the most softening. So intermodal would be in that range. But overall, we're still seeing very high utilization of cars. We're seeing traffic flat to 2021, and we're still seeing customers who are wanting to move more by rail. So we think we can survive or we would have a -- we will be resistant to a mild recession. And if you look at our backlog, we got $3.9 billion in backlog sitting there, which gives us really good visibility into this year.

Thanks for that. And then just lastly, on the free cash flow. I know a question was asked there, but the burn this quarter, I think, on a -- just looking at operating cash flow less CapEx, roughly $900 million. Is there any plans with respect to capital decisions? Thanks for the questions.

Yeah, Gordon. This is Eric. If you back out, your $900 million, I think you're looking at all the lease fleet investment and I'd just refer you to our adjusted cash flow in the disclosure where we kind of walked through the fleet investment is certainly -- the headline is a big number. But once you finance it, it doesn't require a lot of cash. And also a reminder, that's pretty tax-effective capital investment. And so from a cash flow standpoint, it's a relatively good answer. And I'd just refer you to our disclosure on that.

Thanks again.

Yeah.

Our next question will come from Steve Barger with KeyBanc. You may now go ahead.

Thanks. Jean, you said Trinity is generating good operating leverage. And to that point, incremental margin came in around 20% for 2022. As you think about mix for '23, do you expect incremental contribution margin to come in above that?

So Steve, when you look at the earnings guidance that we've given and also some of the color around fewer car sales and some of the color around deliveries that would imply a pretty healthy incremental margin. And so it kind of depends on where in the range you are. But the -- I would expect the incremental margin to be at a very good clip in 2023, as we're sitting here. I don't know if we're going to give them the specifics, but your math is correct. When you look at just the volume that we're talking about and the step up in earnings of 70%, but you'll -- there's got to be a lot of that from incremental margin.

Right. Well, and it has to come from the Rail Group, right, because you put up a huge incremental margin on lease in 2022?

Yeah, correct.

Okay. And you said when you ramp production, on-time delivery went down. Why is that? Could they not get material? Are they having their own labor issues or are these diversified suppliers who are prioritizing capacity to other industries? Just what happened with the supply base?

So a lot of the supply base had labor issues just like everyone else in North America. We have over 95% of our materials we build our railcars with come out of North America. So it was, one, they got used to the rate -- run rate everyone was going. They figured out how to make that work for them. And then when we try to step it, they fell backwards. So they are working on it. We've seen some improvement, but we still have pockets that pop-up every once in a while for different components. And remember, I think I mentioned a little bit ago earlier that we're trying to give them more visibility to that signal. So typically, you give them 60, 90 days. We're trying to go out further, especially with the backlog we have.

Got it. And I've been jumping around on the call, so sorry, if I missed this. But Eric, I think you said you're prioritizing more dividend versus buyback in '23. First of all, did I hear that right? And well, I guess, we'll just start there.

Yeah. Steve, you did hear that right. We looked -- the question earlier was how much share buybacks are baked into the guidance. And my answer was modest and that more of the capital allocation is shifting to the dividend.

Is that going to be sustainable? Is it -- you've obviously taken out at 45% of the shares in the last six years or so. Is this a shift that we should be thinking about on a go-forward basis that more cash will be allocate the dividend?

I think it's more of a phenomenon for this year. We had our three-year plan and our three-year plan. We talked about significant share repurchases and dividend growth, I think by all accounts, we've accomplished that. And as we think forward to the next three years over the next planning period, we will provide more information on that, but we're not doing at this time.

Understood. Okay. Thanks.

Thanks.

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

Well, thank you, and thank you again, everyone for joining us this morning. We believe we are well positioned for a strong year in 2023. Our guidance reflects higher lease rates, higher deliveries and efficiency improvement driving higher margins and generating cash flow. I want to thank our team for their hard work this year and their ability to execute in a challenging environment. Thank you again for your continued support.

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