Good day, and welcome to the Trinity Industries' Fourth Quarter and Full Year 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 includes statements as to estimates, expectations, intentions, and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants that -- 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 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 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 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 fourth quarter earnings conference call event link. A replay of today's call will be available after 10:30 a.m. Eastern Time through midnight on February 29, 2024. 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 Anne, and good morning, everyone. We ended 2023 on a strong note and proved our ability to deliver results despite unexpected challenges throughout the year. Our 2023 revenue of $3 billion was up 51% year-over-year. Full-year GAAP EPS was a $1.43 per diluted share and adjusted EPS was a $1.38, up 47% year-over-year. Segment margins, excluding railcar sales, were up year-over-year in both the Rail Products Group and the Railcar Leasing and Management Services group. While our 2023 results show significant progress, I'm also encouraged by the forward metrics that are positioning our operations for an even stronger 2024. The future lease rate differential, or FLRD, is currently 23.7% and our fleet utilization remains high at 97.5%. These indicators show continued strength in the lease fleet and our ability to increase lease rates. On the Rail Products side of the business, the backlog of $3.2 billion gives us production visibility. It allows us to efficiently plan our operations and compete for business that maximizes our platform's returns in the current market. Eric will discuss our financial expectations for 2024, but we are well positioned to execute a solid year. We also believe we are well positioned in sustainability, safety, and diversity. And I would like to share a few notable updates from these initiatives. In the fourth quarter, Trinity was pleased to receive Union Pacific's first-ever Sustainability Partner Award. We were recognized based on multiple sustainability initiatives. One of the initiatives was our collaboration with UP to deliver the 5239 Covered Hopper which utilizes thinner and lighter materials to maximize the car's capacity. Additionally, as part of its EcoConnexions Partnership Program, CN recognized Trinity for our efforts and commitment to sustainability. In Mexico, we earned the ESR badge again, highlighting our work to promote employee wellbeing, sustainability,…

Thank you, Jean, and good morning, everyone. I'll start by discussing our fourth quarter and full-year financial statements and conclude with high-level guidance for 2024, including a reconciliation to our new segment reporting structure. Starting with the income statement, on a consolidated basis, fourth quarter revenue was $798 million, representing a 35% improvement year-over-year. Company revenues were $3 billion for the full year, 51% higher than 2022. With improved margins in both segments, excluding secondary market railcar sales, we ended the year with GAAP EPS of $1.43 and adjusted EPS of $1.38, which is above our previously issued guidance range of $1.20 to $1.35. We benefited in the fourth quarter and full year from a lower-than-expected tax rate, driven primarily by the release of residual taxes, changes in state apportionment and state rate changes in 2023, and changes in valuation allowances. With a normalized tax rate, we would have completed the year in the lower portion of our guidance range. For the full year, we completed $382 million in secondary market railcar sales for a gain of $83 million, which also benefited our 2023 results. Net interest expense in the year was $266 million, up significantly over 2022, driven by higher interest rates and higher overall average debt. We expect a similar run rate in 2024 to the fourth quarter. Moving to the cash flow statement. Full-year net cash from operations was $309 million, up significantly year-over-year due primarily to stabilized inventory levels and production. Adjusted free cash flow for the year was $29 million. This was driven by higher cash flow from operations, offset by lower lease portfolio sales, and the timing of railcar financing. Our full-year net lease fleet investment was $287 million, in line with our guidance. In the fourth quarter, proceeds from the secondary market railcar…

[Operator Instructions] Our first question comes from Allison Poliniak with Wells Fargo. Please go ahead.

Hi, good morning. Just want to talk to you about the leasing business. Obviously rates are going to move higher for you guys. Utilization is being picky, dropped a little bit. Could you maybe talk about kind of your view for this year? Is that utilization just sort of a one-time thing where we could see it pick back up? How are those conversations going on the renewal fleet for '24 at this point?

Great question. Thanks Allison and I'll start on that. When we look at 2024, we're really excited. You saw for the full year and then the fourth quarter we had renewal versus expiring rates up over 30%. The vast majority of the markets that these cars serve are improving and the utilization, sometimes that'll go up and down depending on the timing. We did have some cars come back. Sometimes you have to put them through the shop to get them ready to go back into service. So we still see utilization being strong. Excited about that FLRD, the mix of cars that are going to be expiring this year and then our ability to increase the rates that are going on with those cars. The last thing is our term. We've been increasing the term for these cars in '22 it was an average of 47 months on the renewals and '23 that went up to 54 months. So all of our forward looking metrics are going in the right direction.

Great. And then just on the maintenance side, I guess a little bit more color on the decision to move it over, was it being underutilized at this point? And then I know, Eric, you mentioned maintenance still elevated. Is it going to be up relative to what it was in 2023? Thanks.

Sure. So when you look at the maintenance to move it over into the leasing company, the reason we did that is it gives us a very strong linkage. When we look at our total cost of ownership for our customers in the lease fleet, we have great quality in our new cars that we're producing and through that we have less shopping. But when we do shop, we can control the cost better. We can also look at the industry leading turn times we have for those cars. So all those are benefits and we want to drive that throughout our lease leap to get as many cars of our own cars through those shops as possible. The other thing that we've added over the last year to has been our mobile repair units. And again, that's to benefit us and our customers because if you have a mobile repair unit, you don't have the freight cost associated with moving it to a shop. You also don't have the time associated with getting that. So the cars are in service more for those customers and gives us a benefit. When you look at the maintenance headwinds that we're seeing for the next couple of years. I think you've heard that throughout the industry, that's really to do with HMC16. So, mandated compliance work that has to be done over the next several years. And so we're facing that. The way we're looking at trying to mitigate some of those costs are putting more cars through our own shops using those mobile repair units. So it all goes in concert. And I would say the final thing is it should allow you to compare us very easily with other leasing companies. Now we have everything in that segment that compares us directly with others.

Got it. Thank you.

Our next question comes from Justin Long with Stephens. Please go ahead.

Thanks, and good morning. So, maybe to start with the question on Rail Products Group margins. It was helpful to get the guidance for the full year, but could you give us a sense for where you're expecting to start the year as we move into the first quarter? I know they are recently been the issues at Eagle Pass. But curious if that's something that will linger into 1Q and then maybe give us a sense of where you're expecting to exit the year as well. Just thinking about that progression.

So, Justin, I'm going to start with leasing. Just to say again, very strong FLRD utilization and great renewal rates versus expiring. So very stable, very strong improvement area with only 37% of that fleet being reprised so far. When we go to look at operations or manufacturing, some of the headwinds that we saw in Q4 at the border will carry over into the first quarter, along with the fact that we expect to deliver the majority of those 1,300 units that did not cross the border in the fourth quarter in the first quarter of 2024. And those units did have some compression on the margin because of the extra freight that was incurred, the extra storage cost, the inefficiencies due to some of that congestion, and the supply chain issues that we had. So that carries in. Now, I don't give quarterly guidance, but I think I've given you enough looking at the fact that we expect some compression at the beginning and we expect to improve typically in our business as we go throughout the year.

Okay. Well, maybe to ask it this way, you gave that range of 6% to 8%. Are you expecting to remain in that range throughout the year?

We would expect, based off headwinds at the first quarter, for the fourth quarter to be higher, but we're not giving quarterly guidance. So that's just right now looking at the numbers and doing the math.

Okay, understood. And maybe secondly, I think there was a comment around inquiries picking up substantially as we've moved here into the first quarter. I was wondering if you could provide a little bit more color on what's driving that. And as we think about that pickup to just kind of give us a frame of reference. Do you think it's enough to support growth in the backlog the next quarter or two after seeing backlog taper here the past year or so?

So I'm going to go ahead and start out with the backlog. We've got about half the industry backlog sitting in our books. And in our script, we said we expect to deliver about 53% of that this year. So looking at the order entry rate for the industry, we think that solidly supports the 40,000 industry deliveries that we talked about for the year. In the last year, it was closer to the 45%, but we're still within that range. When you look at the inquiry levels, what's so exciting those are we're starting to see more on tank cars, especially specialty tank cars. And so that's a movement that we haven't been hearing about. It's been a freight car led increase in the order entry and seeing tank cars come back is great. The other part of that is covered hoppers. We've seen some improvement there in the orders and also autoracks remain strong. And that's really driven by the mandatory requirement or aging out of some of those autoracks But if you start at the beginning of 2020 and go through the end of 2023, the industry is at a deficit of about 25,000 cars. So more cars have been retired than have been built. So we still see a strong need there overall for the cars and then the inquiry level supporting that 40,000 industry level deliveries for this year.

Okay. Thanks for the time.

Thank you.

Our next question comes from Matt Elkott with TD Cowen. Please go ahead.

Good morning. Thank you. First, a quick clarification on the guide. The magnitude of the three headwinds reflected in it, is it in the order you guys listed, meaning railcar sales is the biggest headwind followed by eliminations and tax? And secondly, did you give the percentage of cars you expect to build for your own lease fleet and how it compares to last year?

Yes, Matt, this is Eric. We'll take the second part of that. We talked about 20% to 25% of our deliveries this year going to the lease fleet. And so that's similar range it was in '23. It's certainly down from what it was in previous years. We're usually closer to 30% to 35%. When you look at - I'm sorry, I drew a blank down…

The order of the headwinds.

Yes. So the gains, we did quantify the gains, saying about approximately half the gains. In terms of the other two, we didn't quantify, but I think that the order kind of does speak for itself in terms of what we're looking at in terms of significance.

Okay. And, Eric, the lower expected sales, is it a function of secondary market valuations easing and overall demand moderating, or is it more specific to factors?

Not at all. When you look at the secondary market, the secondary market for us is demonstrating the fourth quarter still remains very strong. We're seeing a lot of activity, both breadth and depth, when it comes down specifically to our numbers. As we look at our leasing backlog and the planned additions we have with our fleet, they're a little bit back in weighted on the year. And so it's just a matter of timing. I talked about $300 million to $400 million of net fleet investment. It averaged about $300 million. So it's up a little bit. And a lot of that is due to timing. We really look at that more over a multi-year view. And so it's a little bit higher than normal. But the other side of it is the returns are good. And so the lease originations that we are booking, we're very happy with those lease rates, especially in light of a higher interest rate environment, they're well above our hurdle, and so we feel good about what we're originating, but then it gets in the timing of if we were going to monetize anything.

And Matt, I will say that we do reserve the right to be opportunistic if something comes up. So this is our plan right now.

That makes sense. And just one last question. Thanks, Jean. Eric, you mentioned, I think you mentioned briefly, absolute spot lease rates. Can you maybe give some more insight on how they've trended in the fourth quarter and where you see them trending in the first quarter? Maybe some more granularity by car type, as well as overall by total fleet?

Yes. So I don't know that I mentioned anything about spot rates, but we can go there anyway.

I thought you said they're still solid, but maybe I.

Yes. Okay. The rate lease rates are still very strong. When we look at the trends in lease rates, we're still seeing average lease rates across the portfolio still increasing. When you drill down in the car types, we're seeing that in most of the car types. So we're seeing really strong. Effectively, the yield on assets is still increasing, which is a good indicator. And as we look at the supply demand dynamics going forward and as we look at our expiring rates for this year, that's why we're pretty bullish on our FLRD that we see it's going to maintain a very positive number. And so that's why we feel good about the lease complete and that's why we feel good about our outlook.

So quarter-over-quarter spot lease rates are still trending positively?

Yes.

Are you guys surprised by that given the fact that…

I'm not, let me tell you why. When you look at new car lease rates, new car prices are much higher, marginal cost of capital are higher. To invest in a new rail car still requires a very high lease rate. When you compare that to fleet averages, there's a big gap there. And so we still see a lot of room for upward pricing on the yield of assets. The fleet is tight. When you look at rail car loadings, you look at cars and storage, and we look more detailed at that. We see most of the markets in a very solid demand supply environment, and we're not the only one seeing it because other lessors are pushing rates as well.

Great. Thank you so much, Eric. Thanks, Jean.

Thanks.

Our next question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Good morning, everyone. This is Christian Zyla on for Steve Barger. Thanks for taking the questions. First question, what percentage of the total fleet is now owned by lessors. And what do you think the upper limit on that might be? Do you see a day where lessors own most of the active cars or just any thoughts there?

So about 55% of the overall cars are owned by lessors now. And it really depends. The railroads continue to keep some in their own fleet, mainly box cars, autoracks, things like rail cars and grain cars. And we do have end customers who like to have their own fleets also. But 55% is definitely a big shift from when the railroads owned the majority of the cars.

Great. Thank you. And then last quarter, you made the comment that 40% of your backlog will be delivered in '24. I think the most recent one was 53%. Are those additional deliveries primarily driven by the cars impacted by the border issue? Or can you just walk through what changed quarter-to-quarter?

What changed quarter-by-quarter is just the natural roll-off and changes from one quarter to other. We delivered railcars, we took orders, you add another quarter of deliveries. And so I don't know that there's any trend to that. It's just - that's just kind of how the math works.

Got it. And then if I could just sneak one more in. For the rail car margins, I guess, can you just walk through the actions that you guys are planning or can take just to, I think, the commentary is to improve margins, but there will be lower deliveries. So just can you walk through what actions you guys plan on taking? Thank you.

Sure. And when you look at it, we're actually expecting higher deliveries this year. We have the 1,300 carrying over from the prior year. We also talked about the headwinds in the first quarter due to the border issues flowing over into first quarter from fourth quarter and the margins that were impacted by some of the freight storage efficiencies that occurred in 2023 in the fourth quarter due to that border constraint. The other thing that we look at is we're continuing to work on automation. Every quarter, our employees are getting stronger in their training, and we're seeing the efficiency pick up. And so the initiatives, the actions, the training, all lead to improvement throughout the year. And I guess the last thing I will add to it is changeovers. So I would expect our changeovers to be closer to the second half of '23 in 2024. So we do have less of those causing a headwind towards those margins.

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 for joining us this morning. For every unexpected challenge in 2023, Trinity found a unique solution. As we look to 2024, we anticipate continued margin growth, consistent operations and a focus on improving the returns of our business. Thank you for your support of Trinity. We look forward to speaking again in May and seeing you in Dallas in June for the Investor Day.

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