Good day, and welcome to the Trinity Industries First Quarter Ended 31st March 2023 Results Conference Call. [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 include 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 Leigh Mann, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. We appreciate you joining us for the company's First Quarter 2023 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 reconciliations 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 are under the Events and Presentations portion of the website, along with the first quarter earnings conference call's webcast link. A replay of today's call will be available after 10:30 a.m Eastern Time through midnight on May 9, 2023. Replay information is available under the Events and Presentations page on our Investor Relations website. It is now my pleasure to turn the call over to Jean.

Thank you, Leigh Mann, and good morning, everyone. I'll start on Slide 3 to talk about our key messages from today's call, which we will expand on later in our prepared remarks. Our first quarter GAAP EPS from continuing operations was $0.09, and adjusted EPS from continuing operations was $0.07, up $0.04 year-over-year. We ended the quarter with our future lease rate differential, or FLRD, at 44.3%. The FLRD calculates the implied change in lease rates for railcar leases expiring over the next 4 quarters by applying the most recently transacted quarterly lease rate for each railcar type, and our lease fleet utilization improved this quarter to 98.2%, reinforcing that the railcar market remains tight. We are reconfirming our 2023 EPS guidance of $1.50 to $1.70. We are confident in our ability to achieve these results as we look forward in 2023. We expect to see segment operating margins up significantly as we take advantage of the operating leverage of the business, manufacturing backlog and strong railcar lease environment. And finally, in the first quarter, we completed our acquisition of RSI Logistics, a data-centric provider of proprietary rail logistics software and management solutions. I'll discuss this acquisition and how it fits into our digital strategy later in my prepared remarks. And now let's turn to Slide 4 for a market update. Starting on the top left, despite intermodal pulling down rail traffic, carloads are up almost 4% year-over-year. We're encouraged to see that rail service issues appear to be improving with higher train speeds and shorter dwell times. But overall performance still has room to improve. Near-shoring activities, trucking labor headwinds and heightened interest in ESG continue to foster pent-up demand for rail transportation. Even as railroad service continues to improve, the pent-up demand will continue to drive more rail…

Good morning, everyone. Please turn to Slide 9, where we will discuss consolidated financial results. In the first quarter, revenue of $642 million improved sequentially year-over-year due to higher external railcar deliveries and improved pricing. Our adjusted earnings per share of $0.07 was up year-over-year but down sequentially due to lower lease portfolio sales in the first quarter. Lease portfolio sales were $57 million in the first quarter with a gain of $14 million. Our earnings were aided by a 217% tax benefit. Several moving pieces affected our tax rate in the quarter, and I'll discuss those briefly. In our trip leasing subsidiary, we released stranded tax assets previously recorded in AOCI and recorded an income tax benefit of $11.9 million, $7.5 million of which relates to noncontrolling interest. This results in a net $4.4 million positive impact on net income. Our tax rate also benefited by a $4 million change in valuation allowances. These items were partially offset by a remeasurement of net-deferred tax liabilities due to the RSI acquisition, resulting in an increase in deferred tax expense of $3.2 million in the quarter. Moving to the cash flow statement. Our cash flow from continued operations in the quarter was $103 million, and adjusted free cash flow was $36 million after investments and dividends. We did not repurchase any shares in the quarter, but paid $21 million in dividends. In terms of investing activity, our fleet additions totaled $192 million, including deliveries, modifications and secondary market additions, offset by lease portfolio sales of $57 million, bringing our net fleet investment in the quarter to $135 million. Lease portfolio sales were low in the quarter, and we expect this number to being fairly lumpy through the year, but we are on track for our net fleet investment full year guidance…

[Operator Instructions]. Our first question comes from the line of Justin Long from Stephens.

Maybe to start with a question on Rail Products Group margins, Jean, I think you said that the guidance was for high single-digit margins. I wanted to clarify that, that was a full year 2023 guide. And if so, maybe you can help us think about the quarterly cadence. Eric, a moment ago, I think you made a comment that margins would improve in the second half. So I just wanted to understand, are you expecting sequential improvement in margins in the second quarter? And then maybe where we go in the second half in order to get to that high single-digit target?

Great question, Justin. Let me talk a little bit about the progression of the year to help you understand what we're seeing. So in the first half of the year, in Rail Product, we have 2/3 of the year's changeover occurring. First quarter, we had about 1/3 of those. So we also talked about being able to hire finally in the first quarter. That was really great. We have the people we need now to get the throughput we need, but it also presented the training headwinds. If you look at our top 2, our largest plants for manufacturing, 20% of the workforce has less than 6 months. Typically, they're in training for 3 months and then you're ramping on the efficiency for at least the next 3 months. So we expect to see that continue into the second quarter as some of those people will stay in training or getting up to speed. In the first quarter, good news, we saw some rail service and supply chain improvements, which is great. We expect that to continue into the second quarter. And again, in the first half, we expect more cars to deliver into our fleet, and you'll see more of that in the second quarter. Looking at the second half of the year in Rail Products, we're going to have the remaining 1/3 of the changeovers. And it's a few less in the third quarter than fourth, but fairly even there on that. We're also looking at -- to maintain better rail service, the supply chain continuing to improve and more importantly, that training complete and the efficiency still ramping up. So I would expect improvement through the year. I would expect the second half to be much greater than the first half. Does that answer the question, Justin?

That's a lot of helpful detail. And given the first quarter was roughly 4%, to get to that high single-digit full year target, it suggests the exit rate might be above the high single digits? Is that fair?

So I would say with high single digits overall for the number that we're looking at to exit the year with.

Okay. Got it. And then maybe as my follow-up for Eric, there was a lot of noise on the tax rate, and you walked through some of the puts and takes there. But I guess, one, I'd like to know why you felt that should be included in the adjusted number? And then maybe any color you can give us on the tax rate going forward? And in addition to that, we love some thoughts on gains on sale going forward, too.

Yes. So Justin, I think we -- I didn't walk through all the pieces of the kind of 3 elements of it. And while those were not included in our forecast for the year, and our guidance, we did include them in our -- we did not adjust them out. We felt that they were related to our core business, and so we didn't adjust them out. In terms of -- and also note because a lot of that -- a lot of the benefit came out through minority interest and so the net impact for the quarter was not as great as the headline might indicate because of it coming out in minority interest. In terms of car sales, so we had modest car sales in the first quarter. Reminder, we still have year 3 of our Wafra program in place, which likely will be in the second half of the year. The market for -- secondary market still remains relatively good. We're active in the market, both as buyers and sellers, and we see opportunities. We see opportunities both on the buy side and the sell side. And so I would characterize it as pretty healthy. You might think because of higher interest rates, that would have cooled off the market. I think what we see is that buyers are priced in future lease rate increases, and therefore, you're assuming that lease rate inflation continues. And so that has supported valuations recently that we have seen their support going forward.

Our next question comes from the line of Bascome Majors from Susquehanna.

You're talking about getting your labor force slowly up to speed and your desired productivity, but you're facing off against a moderately weakening railcar order environment. So I just wanted to walk through the contingency or the ability to avoid reducing the labor force in an environment where maybe railcar production needs to fall later this year or early next year and then having to go back and backfill yet again after the challenges of hiring in Northern Mexico over the last 2 or 3 quarters?

So as we look at the workforce right now, Bascome, what we're seeing is we've got the majority of all of our space filled for this year, taking orders into next year. So the people we have will help us, one, reduce over time as they come in and they're more efficient so that lessens that headwind. And as we get them trained, we're still seeing inquiry levels consistent with our belief of replacement demand for the railcars that are going to be needed. So even though you might see some fluctuation, we don't believe you're going to see the high peaks and valleys that we've seen in previous cycles. We think this one is going to be a little flatter, which will help us maintain that workforce and not have to go through the cycle of retraining again.

Okay. So it sounds like at least into early next year, you have very good visibility into a fairly steady production cadence?

That's correct.

And just to clarify Justin's question, the mid-single -- I'm sorry, the high single-digit margin comment, that was an exit rate and not a full year number. I just want to clarify there.

The full year is a high single-digit number. The exit rate will be stronger than the entry rate.

Yes. Understood. And lastly, the lease rate differential number was considerably strong. I want to bring some more attention to that. You mentioned tank cars in the prepared remarks. Can you walk us through in a little more granular detail? How is that ramping up so quickly? How sustainable is that level of renewal price increases? And are there any quirks about the first quarter that really juiced that number versus where we should think that might settle in the second half of the year or something?

Sure. So when we look at this recovery, it's really supply-driven. And we're seeing increases in interest rates, new car costs are higher, and we don't see that coming down anytime soon, the interest rates or even the car prices because it's really stabilized. So those will support the higher rates for longer. Some of the reasons we believe that is the FLRD at the 44.3%, the fact that the utilization went up to 98.2%, and the fact that our lease term actually extended in the first quarter. In 2022, we averaged about 47 months and the first quarter of this year, it extended out to 61 months. So what's that telling us that market is still tight, that they still really want those cars that are out there existing. And when we look at new car prices as compared to our leased or existing cars, there's still a fraction on the lease pricing. So there's a lot of headroom between the new car price and that -- new price rate and the existing car rate.

Our next question comes from the line of Matt Elkott from TD Cowen.

My first question is on demand environment. We saw some of the rails starting to do park locomotives, UNPs, parking, 100 CSX might do something similar. I know that the rails have, in past cycles, returned some railcars as well when they come off leases. Are you guys seeing any signs that the railroads might be contemplating similar steps with railcars as locomotives as their traffic remains stubbornly low?

Okay. Well, Matt, I'm going to start out with the non-intermodal volumes are still up year-over-year and really being driven with automotive, agriculture, energy still there. The headwinds are really the intermodal and chemical. I think you know that we are not exposed on the intermodal for our lease fleet at all and that is definitely helping us. We've not heard or seen actual request to return. We're actually still seeing very strong inquiries and the railroads are a big part of that.

That's helpful, Jean. And then just staying on the demand front, service is improving. I mean by many measures, it's still below 2019 levels, but it looks like it's heading in that direction, in the right direction for the rails. And I know that's a tailwind, that's a good thing for you guys long term, but we all know that in the intermediate term, it can be a headwind to equipment demand. You couple that with the fact that traffic in general is down, I mean, are you surprised that lease rates are holding up as well as they are? Just any kind of sense you have on what demand might look like going forward?

Okay. What we still believe there's pent up demand for the rail traffic loads that want to go on to rail that have not been able to. We're encouraged by the railroads improving their overall service metrics. We're also encouraged. I don't know if you saw the trains magazine article that talked about incentives going in at NS, CSX and UP, with the shift towards growth. I think you're hearing that talk a lot more, and we don't think that will come to fruition overnight, but we think that will help in the long term. And when you look at overall, the pricing for leasing, we're not surprised. Again when we look at the cost of a new car and what those rates will be, still a lot higher, a lot of headroom from the existing lease freight prices. So we expect that delta to continue to come down and those prices to get closer.

Okay. And one last follow-up on the secondary market front. I mean, I think, Eric, you talked about the market continuing to be strong. Given the liquidity issue in the banking sector and the banks trying to boost their balance sheets, do you think some of the bank-owned fleet, whether large or small, may be more likely to go for sale in the next couple of quarters?

Matt, I don't know. There's certainly been rumors of deals in the market. At the end of the day, it comes down to you need a willing buyer and a willing seller. And I think when you look at those assets in the bank-owned portfolios, I think, generally, you're going to see those assets are improving and the yield on those assets are improving. So the need to -- the ability to wait it out is probably there because they're going to benefit from the same things we're talking about in terms of higher lease rates. And so I think it depends on what they decide to do. But in the meantime, I think they're going to benefit from higher yields on those assets.

But do you guys have like a sweet spot as to how big of a fleet you might go -- you might be interested in? Or is there -- is size not necessary?

We don't have any stated goals. I think we have scale. Our fleet of roughly 110,000 railcars on our balance sheet provides scale. And it comes down to allocating our capital and improving the returns of the business. I think when we've talked over the last several years about modest fleet growth, I think that's still what we're looking to do. If there was something that came along, that doesn't mean we're not interested. It's just that it's going to be at the right return.

[Operator Instructions]. Our next question comes from the line of Steve Barger from KeyBanc.

This is Jacob Moore on for Steve this morning. My first question, just as a sort of a follow-up to a previous question. We saw first quarter industry orders yesterday annualized around 33,000. So I'm just curious, as you sit here about a month in, how would you compare 2Q to date to 1Q in terms of order inquiry activity?

So the inquiry activity still remains consistent with our belief of replacement demand. And a lot of that is driven by certain car types. And I will say that certain customers or some customers are delaying the decision to go ahead and place the order as they look at the macroeconomic uncertainty. But again, overall, the inquiries would support the replacement demand for us.

Okay. Got it. And then for the second question, going back to the Holden acquisition, if I read the 10-K correctly, there wasn't much in the way of physical assets in that acquisition, maybe some backlog. So my question is, what assets did you buy? And could you -- or would you be willing to provide us with trailing 12 months revenue and EBITDA?

So yes, Jacob, you're right. There are not a lot of assets on the business. That was a capital-light business that had some very attractive proprietary products supporting the auto rack market. In terms of breaking out individual performance, at this time, we're not going to break out the individual performance. It was a relatively small acquisition, but we think it's something that will complement our parts business and continue to grow. And as it becomes more meaningful, then we'll talk about it more going forward.

Ladies and gentlemen, 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 2023 is going to be a great year for Trinity, with significant improvements through the year in terms of revenue and operating profit in both our operating segments. We do have a talented and motivated workforce, and we look forward to sharing our progress with you through the year. Thank you again for your continued support.

Thank you. The conference of Trinity Industries has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.