Good morning. Welcome both to the participants in the room, as well as those on the webcast, to our Trinity Industries 2024 investor day. My name is Leigh Anne Mann. I'm the Vice President of Investor Relations for Trinity Industries. Before we begin today, I'd like to provide a quick safety briefing, as we do at all Trinity meetings. I've spoken with the hotel. In the event of an emergency, there's an AED device located behind the front desk, and I've identified members of our Trinity team to call 911, start CPR, and go get the machine in the event of an emergency.
If we have any sort of a weather event, the hotel has requested we go to the ballroom, which is you take a left and another left, and we will congregate there. This morning, we posted an interim update to our corporate social responsibility report. It's available on our company website under the ESG Sustainability tab, and I encourage you to review it for an update on our sustainability initiatives. Turning to the safe harbor statement, please note that today's presentation will include forward-looking statements and non-GAAP statements.
Although forward-looking statements contained in today's presentation are based upon what management of the company believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. I direct investors to the company's most recent 10-Q and 10-K, which are readily available on the Investor Relations tab of the company website, for a full description of the company's risk factors.
Today, you will hear from Jean Savage, our Chief Executive Officer, who will discuss company KPIs and the benefits of the Trinity platform. There will be presentations from three members of her executive leadership team discussing the operations of our business, and then Eric Marchetto, our Chief Financial Officer, will discuss financial metrics and valuation. We'll close with a Q&A session. For those participating on the webcast, please utilize the Q&A feature on your screen to submit questions. It's now my pleasure to turn the presentation over to Jean Savage, our CEO.
Thank you, Leigh Anne, and good morning. My name is Jean Savage, as Leigh Anne said. I've been in industrials for 35 years, starting with Parker Hannifin and then Caterpillar, and the last four years, I've been honored to lead Trinity Industries. Now, I'm going to start with an overview of our operating model. We introduced that to you back in 2020, and it is the philosophy that still guides how we run the business. I'm gonna start at the bottom of the diamond. You know, the values are our foundation. When you go up, we have platforms of businesses.
We have a core of leasing that's enabled by manufacturing, maintenance, and services. Our value-driving initiatives are the optimization of our operations and our lease fleet, innovation for new products and services, providing premier customer service, and also driving sustainability through our business. We do all of this to generate returns for our customers, shareholders, and employees, and this is all to support our company purpose of delivering goods for the good of all.
Now, today, you're gonna hear us talk a lot about Trinity Industries and the industry, but there are four key takeaways I'd like you to leave with today. First, TrinityRail is a partner of choice. We are a leasing company, as I said, with a platform of rail capabilities to support our lease fleet to serve our customers. The strategic decisions we have been making and are making are all to improve our returns for our lease fleet. Second, we have a long history of durable cash flow.
In an environment where you have a balanced supply and stable demand, along with contractual multiyear visibility, we have high conviction that we can have a good cash flow generation to create shareholder value well into the future. On the optimized life cycles, this less volatile operating environment, combined with the reduced volatility in our business that we've put in place, allows us to make sure that we are driving business with growth in leasing and parts and services to optimize our returns, no matter where we are in the cycle.
Finally, on value realization, we believe there's an opportunity for significant value realization over the next three years based on the ROE and cash flow targets we're presenting today. Now, internally, these are the three metrics that we're using to measure our performance over the next three years. Starting with the net fleet investment of $750 million-$1 billion. Based off of where we are in the cycle, the yields we can get from those cars, we believe that capital is well deployed there. Eric will talk to you a little bit later on why we use net investment instead of the gross investment.
Second, cash flow from operations, plus the railcar gains on portfolio sales of $1.2 billion-$1.4 billion over the three years. There are three ways that we generate that cash flow. The first, when we build a car, we can sell it directly to a customer. Second, we can build a car and put it in our lease fleet, and we get rental for that car, and that generates cash from operations.
The third way we do is we put it in our lease fleet, and then we decide to monetize it at higher returns by selling it in the secondary market. You do not generate cash from operations when we do that. That is why we're combining those two metrics to show you the two true generation of the cash from operations for our platform. Portfolio optimization is core to our business. You'll see us continue to use that. Finally, return on equity. In the past, we used pre-tax return on equity. Now, we're going to switch to the adjusted return on equity, which is after tax.
If you compare the two, there's about a 290 basis point effect from going from pre-tax to after tax. The range that we're targeting for the three years is 12%-15%. We have initiatives in our control to drive results and improve these returns over the next three years. We firmly believe that these three metrics represent capital discipline, strategic growth, cash flow generation, operational performance, and a strong balance sheet. Our platform delivers the railcar of choice. That means optimize ownership and usage of the railcar. That means cross-selling with innovative solutions and a differentiated experience.
For shareholders, this means higher fleet utilization, more value streams per car, and ultimately, higher returns. If you were to look at our balance sheet, you're gonna find one asset that's $7 billion. That's our lease fleet. Everything we're doing is to improve the returns of that lease fleet. Our lease fleet leverages each part of our platform to be the railcar of choice and deliver returns. Let me talk about a few of the capabilities we have to support our lease fleet.
First, starting with manufacturing. We build a quality railcar, and then we innovate with our customers, with our new product development, to make sure we have the best car to meet their needs. Our dual role as an owner and an innovative builder creates a feedback loop that helps reinforce our differentiation. Second, we have a captive maintenance fleet or shops. They enhance the fleet returns by maximizing the time and service and maintaining the efficiency over the life of the railcar. We've grown our maintenance over the years to make sure we can serve a significant portion of our own fleet.
We have also been growing our mobile repair unit, which can do minor repairs without having to move that car and have the cost to move it, and also, you have no out-of-service time for that car. When you look at the third area I'm gonna talk about, it's parts and services, and we've been working on growing the aftermarket parts and services business to extend the value creation over the railcar life. We are concentrating on customer-specified components that allow us to leverage our market knowledge and our knowledge of our equipment.
In a minute, Greg will talk to you a little bit about our evolution for our services group. But I do wanna tell you that we're growing services to enhance the shipper's rail experience by focusing on critical logistics and digital services around the railcar. I think this slide illustrates my point well. We believe Trinity has the broadest, deepest rail equipment offerings. We have the most touchpoints across all car types and industries.
We have unique access to the full life cycle of the railcar, and our growth in the lease fleet and parts and services will allow us to continue to optimize the leasing business and improve our shareholder returns. We also believe that a quality, long-term relationship enhances investor returns. I'm gonna start on the left-hand side of the graph.
Six things that we hear from our customers often as they're looking for planning in their supply chain: They want optionality, they want it to be sustainable, they're looking at the economics, they're looking for safety of the product, reliability and service, and also data to help them optimize their fleet. In a minute, you're gonna hear from customer about how they believe that a better suite of offerings creates customer stickiness and also creates opportunities to have products and services to meet their needs.
Moving to the graph on the right, over the last few years, we've seen a switch from more car ownership to more leasing. That increases the opportunities we have over the railcar lease to meet the needs of the customers today and to learn about needs that they may have in the future to have more innovative solutions for them. I'm gonna hand off to three of my key leaders. I'm gonna start with Charley Moore, our Chief Commercial Officer. He's gonna talk to you about our sales team and our commercial process.
Then Greg Mitchell, our EVP of Leasing and Services, will talk to you about the performance of our lease fleet and avenues we have for services growth. And then finally, Kevin Poet, EVP of Operations and Support Services, is going to talk to you about our rail product segment, the improvements that we've seen, and the opportunities we see moving forward. We'll go ahead and start with Charley.
Yeah, thank you, Jean, and good morning. As Jean said, my name is Charley Moore, and I am the Chief Commercial Officer at Trinity Industries. I've been with Trinity Industries a little over five years. Spent time leading our customer delivery organization, our agriculture sales vertical, and then in January of this year, stepped into the chief commercial officer role, leading our commercial organization, which consists of sales, customer service, marketing, and sales operations. Prior to my time at Trinity, I spent 18 years at BNSF Railway.
At BNSF Railway, I had the opportunity to work across multiple groups, from customer service to audit, to the majority of my time in the sales organization. At BNSF, I had the opportunity to work in the consumer product side as well as the industrial products side, which helped my transition into Trinity, but it's also helped me understand our customer's journey dealing in this industry. So I will tell you, sitting in front of you this morning, I am fortunate to lead a great commercial organization, an organization that's focused on driving a better customer experience while delivering results for TrinityRail.
I'm gonna take a few minutes to share about our journey in the sales organization. But before we do that and take a look at our customers and how we tailor our platform to work with them, I thought it'd be good to give you a brief market update. From a North American railcar fleet perspective, it's balanced. As you look at the monthly Association of American Railroads storage data, you'll see that there's been a relatively tight band from cars in storage between 15%-20%.
That's been since early 2022. Part of what's driving that is, starting in 2022, we started to see retirements of railcars, and from 2020 to 2023, we saw approximately 37,000 railcars leave the marketplace. On the other side of that, we talked about retraction. We're also talking about production. We're seeing on an annual basis that there's measured growth of about 30-45,000 railcars being produced on an annual basis. The wave of retirements with the measured new car production is keeping the existing railcar fleet in balance.
I will say we have seen, this is a key word, slight increase in storage over the past couple of months, partially driven by railcar or railroad performance. While storage has increased slightly short term, improving rail service is good for our business. Improved service creates modal shift opportunities and increases rail's overall market share long term. So again, in the long run, better service is more attractive to our shippers because rail is cost-advantaged, it's green, and it's more consistent and reliable. From a macro perspective, it's uneven.
The persistent conversation about interest rates being higher and longer, combined with a strong consumer market on one side and industrial headwinds on the other, makes for uneven effects on rail traffic. While industries like petroleum, chemical, and agriculture have seen improvement and cars coming out of storage, weakness in coal, construction, and materials markets tied back to some of the fleets, we've seen increase in storage rates. Moving to the next slide, it's not uncommon, if you've been in this industry for a long time, it's not uncommon to see segments moving in different directions.
That's where the value or the diversity of our fleet comes in, because we have the ability to move our fleet within those markets as we see changes. T o help us keep the pulse of these trends and tailor our platform to the capabilities, we've divided rail traffic into these five segments. In a few moments, Greg's going to speak about the details of our fleet and our exposure across these markets.
I' d like to highlight our traditional strength in the first three areas: refined products, chemical, energy, and agriculture. About 80% of our fleet serves these markets, and it's served us well. A s you can see, the other two groups create opportunities for us to continue to grow beyond our current fleet in the construction and metals and consumer product segments, especially as railroads rationalize their railcar ownership in some of these areas. My team's also aligned to these markets. So our historical sales approach was regionally based.
I t would help from a travel perspective, but I would have a salesperson go into a chemicals customer and speak about the technical aspects of a railcar, leave that meeting, go into a customer meeting with an agriculture customer, talking about moving grain in grain cars, then leave that meeting and go to a construction customer and talk about moving aggregates in a freight car. That was successful. However, we wanted to get closer to our customers. We wanted to better understand their market drivers and respond quickly to market changes.
I n 2020, we transitioned from a regional model to a market-based model. Again, our desire was to get closer to our customers, understand their business, and really focus on responding quicker by providing an enhanced view of the railcar market. This approach has strengthened our relationships with our customers, with a goal to continue to be what Jean said earlier, the railcar provider of choice, and consult with our customers on how they work with us beyond the railcar, utilizing our platform that differentiates us in the marketplace.
Again, leasing is our primary business, but our ability to utilize our platform to help our customers better manage their supply chains, is the platform we will continue to build upon. In lieu of me telling you why I believe our platform differentiates us, I thought it would be valuable for you to hear from one of our customers. I n a moment, you will hear from Mike Rath, Senior Vice President of Commodities for Darling Ingredients, and he'll talk to you about the value of Trinity's platform from their organization. Darling is a leasing company with Trinity.
They build cars with Trinity. They also utilize our services, including RSI Logistics. A s a reminder, RSI Logistics is a company that we acquired in 2023. They've been around for 40 years, developing software and software and logistics platforms to help improve the customer's experience in the rail industry. RSI brought 200 customers to, to us. Some of those are existing customers, some of those are new customers. That created opportunities for us to go deeper with our customer base.
A gain, in this video, you'll hear from Mike Rath, again, Senior Vice President of Commodities for Darling Ingredients. Darling repurposes and recycles material from animal, agriculture, and food industries in North America, transforming them into essential ingredients that do everything from feed animals, to fertilize crops, to fuel planes. Rail is integral to their supply chain, so I'll turn it over to Mike.
Hi, my name is Michael Rath. I'm with Darling Ingredients, Senior Vice President of Commodities. I would like to take a moment today to give you a little testimony and background on the relationship that we have with Trinity Industries. I'd like to give a shout-out to someone by the name of John Christensen, who is probably one of the most experienced and knowledgeable people that I know in the railroad industry, in every aspect, from safety to compliance, to maintenance, you know, to what's the government input going to be in the next five years.
I think that's one of the key parts, not only at the senior level, but our day-to-day, week-to-week, contacts, we have great relationships, and Trinity has really developed, their intellectual portfolio there. You know, I think Trinity Industries, through us and through that relationship and through the growth, had an inside look into the growth of. that was going to occur in the renewable diesel arena. Let's go back: 2012, 2013, I think we were producing, as an industry, 300 million gallons annually, and today, we're gonna produce about 5 billion gallons in 2024, somewhere around that number, give or take.
T hat's a lot of rail cars, that's a lot of transportation, that's a lot of service, and so there are big opportunities for Trinity Industries on a growth platform. So I think, you know, the relationship that we developed there really was beneficial to both parties. We grew our portfolio with Trinity. They understood the marketplace from someone that was growing the marketplace, and that set them on a platform to be able to capture a lot of growth potential.
When we look forward, we're a growth company, and when we look at growth, we look at the rail side, and we say: What are the key items for growth partners? Number one, do they build cars? Number two, do they lease cars? Number three, do they have a maintenance program for cars? And then four, the service side. And I think that Trinity made a great acquisition here in the last couple of years with the acquisition of RSI.
We had been a customer of RSI for over 10 years, and Charley was kind enough, once the acquisition was announced, he invited us over and said, "Hey, I'd like to have a little history on what your relationship has been, what it is, and how can we improve on it?" , and we went through everything, and the one thing that we told Charley that I remember is, you know, "Please, let's make sure in an acquisition, we don't have anything fall through the cracks." I'm happy to say we haven't had one item fall through the cracks since the acquisition, and RSI is really key to our day-to-day efficiencies.
You know, and when we look forward, Trinity's platform excites us. We think technology is going to be a big player in railcar efficiencies as we move forward, and those efficiencies being car movement, car utilization, location of cars for us and our customers, and most importantly, the safety of our railcars moving on today's tracks with more and more people driving. So you add that with the access to capital and their ability to grow, and we're pretty excited where Trinity could be, and, and as a partner, we're happy to be a partner with Trinity Industries.
Bringing it all together with the video and Jean's comments earlier, not only do we believe our platform adds tremendous value, our customers do as well. Customers choose Trinity because of our industry-leading capabilities and the people we choose, the people that work with Trinity every day to help lead our businesses forward. Now, I'll pass this over to Greg Mitchell, who will discuss our leasing and services segment.
Thank you, Charley. Good morning. I am Greg Mitchell. I'm the Executive Vice President of our Leasing and Services. I've been with Trinity for 17 years. The past five years has been really focused on our rail business. I served as Chief Commercial Officer prior to Charley, and now I oversee the leasing and services portion of what we do. Prior to Trinity, I spent 20 years working in supply chain and logistics, for companies like Walmart and Gap. I'd like to discuss with you three key areas.
I'd like to do a drill down on the makeup of our fleet, talk about, how we continue to optimize our fleet as well as our leasing business, and then conclude with, what we think is coming and what we see, as really exciting. We believe we have the most diversified portfolio of railcar equipment. Our consolidated fleet is just over 110,000 railcars, owned and partially owned. Another 30,000 railcars are a part of our rail investment vehicle platform, where we build and manage railcar fleets on behalf of passive investor partners. Our fleet, as you can tell by the chart we provided, is very diverse.
We provide 270 different railcar designs, supporting about 900 different commodities. 53% of our fleet is freight, and 47% of our fleet is made up of tank cars. Charley said it, we have verticals, and if you look from left to right as we present, there are about 81% of our railcars support three main categories, being refined products and chemicals, energy, and agriculture. Within each vertical, you'll see that there's a mix of both freight and tank cars across the portfolio, across the markets. But our railcars are also quite versatile.
Based on demand and through railcar assignment activities, we can modify, move from service to service, different types of service, different customers, based on where the market activity is leading us. We can optimize our portfolio through our manufacturing business as well as the secondary market based on demand trends, and we're always seeking, as Jean said earlier, the best returns. Diversity in our fleet also means that we're not overly exposed to any one particular single end market or railcar type or an industry trend. Charley mentioned it, we have the ability to service a broad group of customers.
Through the leasing and manufacturing activities and the transactions that we do, we get a lot of deep visibility into market trends with our customers, where things are expanding, any particular market is expanding or retracting. We also get a deep market understanding that gives us a head start on what we need to look for in anticipation of railcar needs. It's our focus to stay well-utilized and to support any emerging industry trends that we see. Moving to the next slide. I'd like to discuss what our team has accomplished the last few years and how it's reflected in our overall performance.
I am tremendously proud of the work our team has done to drive the right disciplines into our business that has really made a difference. The line on the graph on the bottom of this slide shows our future lease rate differential or FLRD, and you can see it's moved higher over the last few years, all while our fleet utilization, represented by the bars, has remained consistently above 95%. You may remember, we calculate FLRD by applying the current market rates that we achieved to the like railcars expiring over the coming 12 months, and it gives us a view towards improved rates.
FLRD has been positive over the last 11 quarters and double-digit positive over the last eight quarters. Over the last eight quarters, we have repriced about 41% of our fleet. Please note that we reprice about 15%-20% of our fleet every year, and we continue to see that revenue tick up. All this to say, we still have more upside, as you can see, to repricing of our lease fleet, and we have the right disciplines in place to make that happen. Fleet optimization is an ongoing process. In fact, we've been leasing railcars now for 45 years.
We use our manufacturing business to add railcars to our fleet, and when we see the fleet moving out of balance, we have the ability to move railcars to different customers or to different service needs, or modify them to adjust to a different commodity need, always with a view to making the right railcars available to the customer. I also want to briefly mention our maintenance business and the progress we've made there. Jean said it earlier, the most important value that Trinity delivers to our customer is an optimal cost of ownership of a railcar.
While lease rates, terms, quality of our railcar is critical, we also know that uptime in a supply chain for any customer is also critical, and Trinity's maintenance capabilities are a very important differentiator when a customer considers a railcar partner. Our ability to service our own fleet through our maintenance network allows for industry-leading turn times, meaning that get the car to the shop, get the car through the shop, and get the railcar back into the market as quickly as possible, and provide, through that routine, a better customer experience.
We're also investing in our mobile repair unit business, or our MRU business, which allows us to do minor repairs on-site rather than moving the car to maintenance, which can incur additional freight costs for the customer. We'll continue to see success in maintenance and utilizing MRUs in our business. Let's talk services. Trinity is on a journey to make rail shipping an easy choice for shippers across North America. Rail can be complex, and we all know that service in the rail industry can be inconsistent and a challenge.
We are offering a more intuitive, efficient, cost-effective digital solution, where we partner with customers, particularly those that are on their own path to modernizing their supply chain and their freight car management systems. Our RSI acquisition brings us a step closer to bridging the gap between the first mile and the last mile experience.
By combining Trinity's Trinsight telematics services with RSI's advanced logistics, our shippers can now plan for a more predictable supply chain, from procurement through shipment management, and back it up with GPS real-time data to develop actionable insights. Add to that, RSI also brought to Trinity transloading services for the last mile from rail to truck.
Combined with access to Trinity's maintenance shops, the industry now has an end-to-end solution for a more sustainable means to ship freight by rail. In summary, our digital platform provides our customers with integrated visibility, rail car shipments, and analytics to develop actions and insights for their supply chain. These capabilities also position us to potentially partner with other modes of transportation to ease the supply chain planning, but expand rail usage into our customer supply chains. And finally, a roadmap to where we're headed. We are innovating rail logistics.
Supply chain risk and friction points surfaced and were uncovered by the pandemic we went through recently, which emphasized the risk and opportunity that really exist in rail car management. For Trinity, this period only validates our strategy. Focus on total cost of railcar ownership has changed in how the industry has operated in the past, and we see a significant opportunity to meet market service needs for our customer and monetize that through our platform.
We co-founded RailPulse, which is an industry coalition and platform designed to develop and receive standardized railcar telematics for real-time data. We created Trinsight to help make that real-time data make sense to the customer for, and make it accessible for insights and actions. And we acquired Quasar to provide yard management capability, particularly for our mid and large-sized customers who need on-site yard management software. As you look to the middle pinwheel, you'll see where we are today as we indicate our current focus on the integration of RSI into our business.
The area shaded blue represent existing Trinity offerings prior to the acquisition, and the gray represents what RSI brought to the table. This acquisition with RSI is not the first or the last step in our efforts to improve what we deliver to our customers. Put simply, there are very few providers that can serve the full scope of what's being expected by rail shipping customers, and Trinity is at the top of that list. The pinwheel to the right represents where we're headed. We are developing many customer touch points across our platform, as well as the rail car life cycle.
As we continue to develop out our service offering, we're finding customers are looking for more support in software and data. Working with them closely across our platform is only strengthening our ability to help them with their supply chains. We want to make rail easier to use, and we're well on our way to developing end-to-end logistics solutions that makes our fleet the rail cars of choice. I mentioned that one of our biggest assets is our ability to supply our fleet through our manufacturing business, and with that, I'd like to pass the discussion to Kevin Poet.
Thank you, Greg. Good morning, everyone. I'm Kevin Poet. I'm the Executive Vice President of Operations and Support Services. I've been with Trinity four years, and I've been in manufacturing operations in various industries, such as automotive and energy, for 35 years. One of the main reasons we are encouraged is that the industry fleet, there are over 250,000 rail cars over the age of 35, and we know that many of those have to be replaced as they near the end of their statutory life. For context, this is five to seven years of industry supply.
Note that while some of the aging population to support declining industries like coal, a vast majority are supporting industries with growing or stable outlooks. Recent attrition has been driven by covered hoppers, boxcars, and coal cars. The last couple of years have illustrated some additional tank car scrapping. Much of this is due to regulatory requirement changes. Replacement demand is the largest driver of new car production. The knowledge we gain from our platform provides us a well-informed view and the projected stability in the market.
In addition to the replacement demand, there are structural changes in our industry that should keep new rail car cycles more muted, including those shown on the chart. The industry production capacity has declined since the 2015 peak. There is no single commodity like crude oil or ethanol driving concentrated demand in a segment of the market. Lessors have been more calculated in their demand, with speculative fleet expansion no longer a strategic focus. Next, we see that Rail Products Group operating margin has shown significant improvement.
As a reminder, we moved our maintenance business into the leasing segment at the start of the year, so these numbers are reflective of the new Rail Products Group, which includes railcar manufacturing and our parts business. For the full year of 2022, our operating margin was 3.5%. In the last couple of years, we've overcome a lot of challenges, including workforce hiring and retention, supply chain disruptions, rising steel prices affecting fixed-price deals taken during the pandemic, and multiple issues at the border.
For the full year 2022, as we've communicated over the past year plus, process improvements and operating efficiency gains have started to flow through in our operating margins. In the first quarter, our margin was 6.6%, and we've guided to a full year range of 6%-8%. Beyond 2024, we still see opportunity for margin expansion. There are a lot of factors that drive margin, including volume and mix of railcars, number of line changeovers, staffing, supply chain, and many others.
However, we think the next year in 2025, we can achieve a segment operating margin of 7%-9%, as shown on the chart, and we can step that up to 9%-11% in 2026. Looking at the rail product business, the key drivers of this opportunity are shown on the left-hand side of the slide. Workforce staffing, retention, and development. The work done since the pandemic has delivered a stable, highly trained, and motivated workforce. We are seeing the results of this effort in safety, quality, and efficiency improvements. Standardizing our product offerings and complexity reduction.
Robust improvements in our go-to-market strategy that Charley laid out have led to improved customer satisfaction, but has also allowed us to reduce complexity in the manufacturing process. Coupled with engineering efforts to reduce component complexity in our designs, are delivering improved performance at a reduced cost. Enhancing our production planning, advanced supply chain processes, and strategic sourcing.
Through footprint rightsizing, capacity utilization, we are well positioned to support the tank and freight car markets as they move through the next cycle. Improvements in our supply chain performance, geographical adjustments in the supply base and logistics systems are also enabling improved delivery performance. Technology out, and automation, we continue to invest in our business and is a key part of our strategy. Significant investments will continue in the areas of robotics and automation, primarily focused on key processes such as welding and material handling.
We are also transforming our business with digital tools on the shop floor to improve accuracy, reduce cycle time, and raise efficiency. Together, we expect these initiatives to result in higher, more durable operating margins. I also want to touch on our parts business, which has been performing very well, enhanced by the 2022 Holden acquisition. The Holden acquisition grew Trinity's pro forma market share for aftermarket parts from 4%-7%, and we still see a lot of opportunity in the parts market.
The photos show our new parts distribution center, which has greatly increased our capabilities, as well as several examples of high-value parts that we supply, including the Holden Chock, which is necessary for vehicle restraint and autoracks. The investments in our parts business infrastructure, digital tools, manufacturing, and fabrication have positioned us for sustained growth in this area.
We believe Trinity's direct participation in the parts market is a critical piece in the overall optimization of customers' total cost of ownership. For the rapidly aging railcar fleet over the next decade, ready supply of parts and maintenance capability make Trinity a more important partner. As a builder and owner of railcars, we have firsthand knowledge of the performance and the need for specific replacement parts. We believe there's an incremental revenue and return opportunity for our business as a result of this holistic report, approach, and our growing exposure in the parts business.
We're encouraged by our results, and we hope that you are too. We're going to take a quick 10-minute break, and then we will come back and have Jean talk bigger picture growth and performance. Thank you.
Well, I want to start out by thanking Charley, Greg, and Kevin for sharing areas of leadership from our business. As you can see, we've got a strong team. We are all working on the same strategic initiatives, and we're working as one Trinity. Now, we continue to see growth in our lease fleet as our core business. We also believe that growth in parts and services only enhances the platform. We value growth from both of our core businesses and parts and services in our next three-year cycle.
During the planning period, we expect to grow the lease fleet, as we mentioned, by $750 million-$1 billion, and growth in parts and services will be notable, but not as large as the lease fleet. By 2030, just for the services, we have aspirations of having $150 million in revenue. The total addressable market for the services is $4 billion. The digital services, though, have a long cycle time, sales cycle, but we do expect to continue to grow this well into the future. The growth opportunities we're seeing are synergistic with products and services we currently provide.
We're focused on returns-improving the returns of each rail car in our fleet by creating customer value through enhancing services offerings. When you look at a customer's cost, they're not just about the lease rate and the number of cars that they have in their fleet. The hours and shipping throughput matter. Energy use and transportation matter. Uptime, turnaround time, and procurement matter. Customers are taking a more holistic approach to supply chain management. We're well-positioned to meet the competitive demands of a full range of those capabilities.
Let me talk a little bit about Trinity's strategic shift to improve our operational leverage and reduce volatility in our results. I'm gonna start on the left-hand side of the chart. Previous industry production was more cyclical and dependent on economic or industrial trends that drove concentrated demand. For example, during the 2008 recession, production fell by over 70%, and during the crude by rail significant fall, it was over 80%. If you move to the right of that first graph on the left, what you see is, going forward, we expect ongoing cycle to be replacement-driven, broader-based, and smoother.
We expect and welcome an environment of lower ceilings and higher floors. We've taken actions in our manufacturing to better align to more stability and have begun to see the success, excuse me, come through in our manufacturing margins. Stable railcar production reduces volatility and allows us to optimize our operating leverage in the long term. Visibility and the ability to plan for production drives efficiency and consistency of margins in a range of different market environments. Now, back in 2020, we introduced our scorecard, and that's the first time we actually set out goals for you to measure us by.
In 2020, we didn't know what was coming, so we set some very aggressive goals. Now, first, I want to recognize the team for meeting the majority of these goals, and they did this without the following being in our original operating plan. We didn't have the sale of the highway business. We didn't have the increasing interest rates increasing our borrowing cost. We didn't know about the supply chain disruptions and the long recovery from those disruptions, nor did we know about the nearshoring effects on our ability to hire and retain employees.
And finally, we definitely didn't know about the border issues that we would be seeing recently. So when we look at overall on the chart, I'm gonna start with the lease portfolio investment. We ended with a net investment of $558 million within the range that we gave you. Greg mentioned the lease fleet utilization. It stayed above the 95%, which was our goal, and we ended the first quarter at 97.5% for this year.
We did take one extra quarter to meet the pre-tax ROE that we gave you, but in the first quarter of 2024, we ended with a 16.2% pre-tax return on equity. We were able to rightsize our balance sheet, which allowed us to more efficiently operate our lease fleet. The LTV stayed within the range of 60%-65%. On return of capital, we had double-digit CAGR on dividends, and we had approximately $900 million worth of share repurchases in the period.
Now, Kevin discussed the rail products margin, and although we did not meet the goal in the last three years, we are encouraged by recent results and trends and are seeing our momentum going forward as positive. Now, a few items to note on the cash flow from operations. Now, that one, the original plan did not have the sale of the highway business, which is a very good cash-generating business, nor did it have the increase in inventory that we were gonna have to hold to overcome a lot of the supply chain issues.
There was also a significant increase in material cost, which led to more cars going into our lease fleet rather than going into direct sales. And when you look at that, we were able to monetize those cars later in the secondary market, but as I told you early in the presentation, that does not contribute to our cash flow from operations. Now, looking forward beyond 2026, we want to talk a little bit about some of the emerging trends that we see.
When you think about sustainability, you've heard us talk over and over about the fact that railroad is the most sustainable mode of land-based transportation. As we see customers have increased social demand on their businesses, they're looking for more climate-friendly supply chains. You know, it is the right time for us to be modernizing the network, which makes it easier for them to switch from road to rail. For the energy transition, it really presents an opportunity for us to either use our existing fleet or to provide new products through our development to meet the demands that they have for those services.
The modal share, we've talked about it, on the calls quite a bit. We believe that the railroads are focusing more on customer service and their experience. We're seeing their metrics start to go in the right direction, which should also help the consistency the customers want to switch from road to rail. On international demand, unlike other companies, Trinity doesn't have an international presence, but the interest in the North American freight rail expertise has become more valuable. and we are exploring our opportunities in the Middle East and in India.
Now, I bring up these long-term trends because we believe Trinity has a valued voice in the industry as a market leader. We're focused on staying ahead of these emerging trends to drive more value to Trinity and to, ultimately, our shareholders. I'm going to now turn it over to Eric Marchetto to talk to us about the financial performance and how Trinity can drive value through the economic cycle. Sorry.
Thanks, Jean. Good morning. I'm Eric Marchetto. I'm the Chief Financial Officer for the company. I've been with the company for 29 years in various roles, from capital markets to financial roles in TrinityRail, along with leading our commercial team and leading TrinityRail back in the day. I've been the Chief Financial Officer since 2020. As Jean mentioned, in the first quarter, we announced a trailing twelve months pre-tax ROE of 16.2%. Using that as my starting point, let's walk through the history on how we got there over the last three years.
At our 2020 Investor Day, we had a pre-tax ROE of 5.5%, which included our highway business. We made the decision to sell the highway business in 2021 and removing its profitability from the numerator, we moved us to a revised starting point of 4.3%. When you look at the improvement from 4.3% to 16.2%, two-thirds of the improvement came from our balance sheet optimization, and the remaining one-third was driven by PBT initiatives.
Let's look at the balance sheet actions first. 820 basis points of our ROE improvement came from the return of capital, which included significant share repurchases and consistent dividend payments. These shares include the repurchases we made with $375 million in proceeds from the highway sale in 2021, as well as core repurchases from our operating cash flow.
Recall at our 2020 Investor Day, we foreshadowed significant potential, share repurchase activity. The remaining 370 basis points improvement came from PBT initiatives, which include early results of our improved operations at Rail Products Group, as well as higher gains on railcar sales, partially offset by the higher interest expense from the increase in our leverage. So we got to our pre-tax ROE, and when we set it, we knew there was a lot of opportunity on the balance sheet side to reduce the denominator. We feel like that work is virtually done.
We will certainly continue to be opportunistic around capital allocation and share repurchases, but not to the degree that we've seen in the last three years. However, on the numerator side, we still see a lot of opportunity for improvement, and this is where we've continued to improve our return on equity. One quick note before moving forward, our new ROE target is a traditional definition, using adjusted net income as a numerator instead of pre-tax income.
Our shareholders ask for metrics that are more commonly defined, so we've made this change, and you'll see that in our KPIs and discussions on results going forward. On the next slide, we're presenting the major balance sheet return on equity drivers over the last three years in a different way. At the left, you can see the reduction in the overall equity base from the sale of highway and return of capital to investors through share repurchases. This reduced our overall share count by approximately 30%.
Holding all else equal, the reduction in our shares outstanding drove implied earnings per share growth of 36% over the last three years. On the right side of the page, we've plotted the increase in our loan-to-value with the increase in Trinity's overall pre-tax ROE. We've transitioned our balance sheet to look more like a traditional equipment finance business in terms of the debt and equity mix, and thus, we should operate at a higher ROE level through this cycle. I want to get a little more detailed on the net and fleet, net fleet investment.
When we talk about net fleet investment, we're talking about railcar additions into our lease fleet through manufacturing or secondary market purchases, plus modifications, sustainable railcar conversions, betterments, offset by secondary market sales or sales in our RIV platform. I think it is well understood that we have a few different options to monetize a railcar. We can sell it directly to a customer as a new railcar, we can put it in our lease fleet, we earn rent on it, and eventually, we can sell it in our RIV platform or the secondary market, depending on our investment targets.
The uncertain part of this is that the customers are the ones making the choice whether to buy or lease a railcar product. Further, these options have very different earnings and cash flow implications. Our primary long-term goal is improving the returns and the cash flow of our lease fleet, so this is why we think putting our net fleet investment target is a proper way to look at the business.
Put another way, there are many paths to hit our three-year target, depending on the dynamics in the market. The point is illustrated on the next slide. Here you can see the ins and outs of net fleet investment over the three-year planning period, and you'll see every year looks different. Gross investment and secondary market activities are dependent on one another. If we put more railcars in investment in our lease fleet, you can expect us to sell more railcars in our RIV program or the secondary market. Again, we're managing that net fleet investment number. Capital allocation is clearly a priority for us.
We want to be very rational in making capital allocation decisions. So what do I mean by rational capital allocation? I mean, we're gonna focus on where the investments drive the highest returns for our business. At the top of that list, on our far right, we believe is our net fleet investment, with a target of $750 million-$1 billion over the next three years. As Jean mentioned, and our business leaders have laid out, there are strong dynamics in the railcar industry, and Trinity is increasingly well-positioned to capitalize.
We expect leasing investment - we expect our investment in leasing, in the leasing portfolio, to be above our weighted average cost of capital and our established hurdle rates. If it is not, then we will reevaluate the decision to invest. But with a strong future lease rate differential and growing demand in key markets, we like the return profile on our fleet. The next area is capital investment in M&A. This is the option that you can expect Trinity to expect, to practice the highest level of diligence and prudence. To be clear, we are very confident in our strategy to drive higher returns from our railcar platform.
We'll be measured when evaluating M&A opportunities. We see, we see focused areas on parts and services that will strengthen our relationships with the industrial shipper while improving the returns on our business. Importantly, it'll continue to reduce the cyclicality of our platform. Lastly, we remain committed to a clear capital return policy with our shareholders. As our three-year targets convey, we expect a significant portion of the cash generation of our business to support investment in our lease fleet.
We remain committed to a dividend growth, as we know that is important to our shareholders, and we will be opportunistic about share repurchases. We are committed to effectively deploying our cash and maintaining an appropriate level of debt, and believe the current cash generation of the business allows us to grow our fleet while returning capital to shareholders. Jean introduced you to our 3-year ROE target of 12%-15%. As a reminder, we are making a shift from pre-tax ROE to a traditional return on equity measure.
We wanted to provide metrics that are more easily comparable and feel that this makes more sense for our business, also given changes in the tax code and our cash tax outlook. Moving the numerator from pre-tax income, our starting point is 13.3% for the last twelve months. After normalizing our tax rate, we get back to 11.8%. So how do we get to 15% from the 11.8%?
The answer is simple: We will improve our margins. We see margin improvement throughout our business. Our earnings growth will come from lease rate, the release rate environment, and continued lease fleet investment. It was, as we've noted, we expect similar demand dynamics and railcar deliveries of 120,000 railcars. We expect our margin for the rail product segment to improve from 4.5% in 2023 to an operating profit margin of 9%-11% in 2026. From a balance sheet perspective, we do not expect significant changes as we are maintaining the optimization already realized.
Jean has already presented our core KPIs over the period, but wanted to give a little more financial guidance on how we see the business evolving over the three-year period, starting with our leasing metrics. On the top of the net fleet investment targets we presented today, we are also setting a goal, a goal of lease fleet utilization of greater than 95% and a leasing and services segment operating margin of 38%-41%, which includes gains on railcar sales. This reflects rising revenues on the leasing side as we reprice more of the fleet, as well as a growing contribution from services throughout the period.
For rail products, we expect industry deliveries to be approximately 120,000 over the period. Obviously, the units will not be even each year, but we think with our market knowledge, our known backlog and the attrition, that this is what we believe the industry will deliver in the period. As Kevin mentioned, we expect operating margin for the segment to range between 6% and 11%, getting slightly better each year. This number also won't be characterized by linear growth, as a mix of railcars and other market elements can move the number around. However, we see the opportunity for steady improvement.
We expect to maintain a loan-to-value of 60%-70% and think this is comfortably supported by our balance sheet, especially given the expected cash generation of the business. We've expanded the upper limit on the LTV, as lease rates and railcar, railcar values have increased. The assets will support a higher level of debt against the net book value. And we are consistently looking for the best use of our capital. We expect to continue to grow our dividend and plan to be opportunistic about share repurchases.
Overall, I believe if we hit these targets, we should create shareholder value for our shareholders. Lastly, we'd like to leave you some food for thought. As you can see here, we have laid out current valuation metrics for Trinity and how they compare with diversified equipment, finance peers, and REITs that own assets in the logistics space. At a high level, we believe the variables that impact asset yields and residual values for railcars are much less complex than they are for wide-body jets or rental vehicles.
Similarly, the use cases, the useful life, the average lease lengths for a railcar are much more uniform and longer than they are for cars, trucks, and planes. Aside from the business model differences, we believe the cash flow dynamics and visibility of our railcar assets look much more like a warehouse real estate than they do equipment finance. Certainly, REITs don't pay corporate income taxes. That said, over the useful life of our respective assets, railcar assets require similar maintenance CapEx. What's most important from this view, in our eyes, is a stark difference.
Multiples that investors are willing to pay for real estate cash flow stream compared to a railcar cash flow stream, despite a lot of similarity in our cash flows, in the cash flows that are contractually generated. As the yield on our assets increase, higher lease rates improvement, our return on equity continue to improve. This should warrant a higher multiple for Trinity. With that view of the return potential in our future, let me iterate, reiterate how Trinity plans to measure our progress in the coming years. We plan to invest $750 million-$1 billion in our fleet on a net basis over the three-year period.
We expect to generate $1.2-$1.4 billion in cash from operations and gains on leased portfolio sales over the period. As a reminder, we are adding the gains to this number, as there are multiple paths for us to create value by building a railcar. We can sell it direct, we can lease it, we can sell it in our RIV platform. This measure captures all three. We believe this metric provides simplicity and clarity as compared to our previous cash flow metric, which is why we're making that change.
We believe the Trinity platform and our strategic initiatives can drive a return on equity of 12%-15% throughout the period. If we hit these KPIs, we believe shareholders will be rewarded. Based on the conviction we have in the strategy and the targets we've outlined, let me echo Jean's takeaways. Trinity is more than a collection of railcars, and our platform is a real competitive difference when customers look for solutions. We have high visibility in our cash flows of our lease fleet and can generate incremental returns throughout our platform.
The decision to improve operating leverage in our business will reduce quarter-to-quarter volatility, which should be welcome for shareholders, but we ultimately believe it will allow us to improve returns throughout the cycle. And lastly, as I just noted, we believe Trinity has the ability to unlock significant shareholder value as we continue to improve our return on equity and our cash flow targets. I'd like to thank everyone for investing your time today with us.
I appreciate the effort shareholders and potential shareholders make to better understand our business. I also want to thank the 8,400 men and women of Trinity. We are a very proud team, and we can achieve these results together over the next three years. Thank you, everybody. We're gonna pause and set up for Q&A, and Leigh Anne will take the lead. Thank you.
All right, thank you. To our webcast participants, there's a Q&A tab on your webcast. Feel free to submit a question, and we will ask them in the room. If you're asking a question in the room, we just ask that you wait for the microphone, and we are open for questions.
Hey, Bascome Majors, Susquehanna. Just some clarifications on a few points in the guidance. The leasing and services margin, 38%-41%. Number one, is that inclusive of gains in that number, or is that a core margin on just the, the lease revenue before gains?
Yeah, number one, it is inclusive of the gains that we did. So we kind of laid it out, so both margins from the segment would capture the whole segment.
Okay, so, you know, that would be a moderate increase from kind of where you were on trailing four or five quarters.
Yeah.
But, but okay, understood. Any thoughts—I mean, you mentioned that lease rate improvement is a big driver of that. You still have a lot of the fleet to reprice. I would imagine in your plan that would increase in the subsequent years. So is there a linear nature to that, or just going to be lumpy with the gains in your view?
Yeah, I think the lease rate increases will continue to. Should be smoother because we don't reprice that much each quarter. So that'll, that'll be a more modest, but it should be a consistent pull-through. On the gains, let me just point out, remember, for this year, we guided to less gains in 2024 than 2023. So think of that gains as a little bit of a headwind to the, to the margin improvement.
Understood. So you have the core piece of the margin actually improving and be more sustainable than some of the lift from gains-
Right.
Last year. Okay. And, I know you're not guiding gains, and that would be difficult to do, but, you know, you did have to level set this year. Is starting off with something more like this year than last year further off into our forecast, probably more reasonable?
You know, when you for this year, it certainly is more reasonable 'cause we have visibility. As I mentioned, when you get out to the latter, to the years two and three, we have less visibility. That's why we're really focused on, you know, if we originate more, then gains will be more. If we originate less, gains will be less. So that's really. You know, it's hard to model that the gain number precisely because we're managing that net fleet investment. But this year it was about half in 2024 to 2025 compared to 2023. So that will certainly anchor some of the, you know, some of the changes over the three-year period.
Last, on the guidance from me, then I'll pass it on. But you do have a leap in rail products margins in 2026 to get you back into the double digits, where you've been wanting to be again for, for several years now. But that's also beyond kind of where you have backlog visibility, and so you're, I mean, maybe the leap was the word chosen by me there for a reason. So, so what gives you confidence that without, you know, visibility into what your production schedule is gonna look like, that you can take a couple points leap, two years out from now? So.
So when we're looking at it, it's really about cost reduction, and you can see the improvements we're getting in efficiencies from having a stable workforce, higher trained, they've been there for longer. When we're looking at the automation projects that we're doing on the modularity for our car, cars, all of that comes together for overall cost reduction and, less complexity in our manufacturing business, and that gives us confidence for the leap or the change.
Just further to that, underlying all this is, as Kevin talked about in his prepared remarks, we do see the market being very rational, and we're not seeing speculative building for leasing. We're seeing the other builders be rational. So we kinda expect this rationality and this tighter band of higher floors and lower ceilings should result in a more predictable, stable margin environment.
Hey, this is Ryan Deveikis from Wells Fargo. Just kinda like compounding on that, you said, you know, more replacement, more rationality in the fleet building here. Like, I guess, you know, the rails have been talking about modal share growth, right? So how do we kind of bridge, you know, the growth to where there's gonna be a flat, you know, fleet for the foreseeable future?
So we don't have any modal share growth built into our plans. We're saying that it takes time to get the customers comfortable with the consistency of the rail performance. We're trying to make that go quicker with the platform and the services that we're providing to make it easier for them to ship by rail, just like they do on truck.
Thank you. And then I guess just more on that services side or RSI, or RSI Logistics, you know, maybe you can talk about what's going on in that market currently. You know, a big complaint with shippers, at least that we're hearing, is that, you know, it's pretty bad on that side, where rail velocity is increasing. And then you talked about that, you know, $150 million in 2023, I think, goal. If you can just remind us where we are today, and then are, is that just more M&A opportunity, or do we see organic growth off that?
So the aspirational growth we have in services is not off additional M&A. It's based off the services and the internal growth that we see for that business. I mentioned it has a long sales cycle. We're working with some major customers right now who want to use our platform that we use for our lease fleet because they feel it gives them better insights and better controls for their lease fleet.
So we are seeing and having lots of conversations. You heard from Darling that they're using a lot more of the platform, and what we're trying to set up is a customer can use all the platform if they'd like, or they can use pieces of it as it makes it easier for them to use rail.
Okay, and then just last one for me. I mean, the storage numbers and, you know, the, the lessor fleet utilization kind of been stable, you know, relatively speaking, you know, but shippers have been, like, holding on to more rail cars, you know, as of lately. Can you walk us through the dynamics of the next cycle? Is that gonna continue to happen, or we might see a little bit of headwind here?
So over the next three years, we're projecting 123, or 120,000 cars to be built. We said it's not linear, so there may be a few ups and downs, but when you look at the cars that need to be retired, because of their age, we're saying that really drives the demand overall without anything else coming in, like some of the conversions to biodiesel or other things that may happen.
Perfect. Thank you.
Let me give you a little more color on railcar shippers. They are holding on to railcars because they're, you know, everybody—if there's a recession coming, in the last few quarters, shippers have thought that. They're looking beyond that 'cause everybody's expecting to grow. So when we look at our customers, our conversation with our customers, they're all planning on for bigger fleets in the future. So that's why you're seeing, despite improved railroad service, they wanna hold on to those assets, just like they wanna hold on to their people, 'cause our customers are preparing to grow over the next few years.
Perfect. Thank you.
Hey, good morning. This is Jacob Moore from KeyBanc. Thanks for having us and taking the questions. This first one just goes back to the manufacturing margin expansion strategy. Were those drivers listed on the slide in order of importance, or which category offers the most upside should volume stay relatively stable?
. So when you look at those, supply chain improvements and some of the work they're doing there would probably be the top. And after that, you're looking at the, stability in the workforce and the efficiencies that they can maintain as their experience on the shop building these cars gets higher. We see that happening. I'd say the next thing is, as the efficiency gets higher, when we have natural attrition, we won't have to replace. So that's another cost reduction for us as we build those cars.
Great, thank you. And then my second is on the updated net lease fleet investment target. I know mix will be a factor that drives differences in units versus dollars, but the midpoint to midpoint dollar increase from the 2020 targets is about 60%. Do you expect the units will be similar?
No, units will probably be a little less than that because railcar, you know, railcar prices are up anywhere from 30%-50%, depending on the car type. So you certainly have inflation in the asset prices, which will drive that. Mix will drive it as well. The last three years have been very freight car forward. While we expect, still, it's more of a freight car market, we do see the tank car market getting slightly better over the period. All those have different averages. So really, it's. We're managing off of the investment dollars, not the units. So we'll manage that off the investment dollars.
Great, thank you.
Thank you. Justin Bergner from Gabelli Funds. First question just is on the manufacturing margin side. How much has your guidance over the next couple of years been reduced by, I guess, ongoing challenges at the border, both in terms of getting cars out and getting supplies in? Obviously, it doesn't necessarily seem like, like things are gonna meaningfully change there, you know, regardless of the outcome in November. So how has that affected your manufacturing margin guidance?
So we did include ongoing headwinds in our analysis. We didn't go through and say what the percentage would be, but we don't expect the border issues to go away overnight. We don't expect some of the other challenges that we've had as far as material price increases and all, to go away overnight. So we took a very conservative look over that time frame. But also remember, inflation still exists, and they're saying higher for longer, and we don't know when that's gonna go away.
Okay, great. My second question relates to some of your goals on the leasing and management side. The utilization goal of 95%+ seems pretty modest, based upon your recent activity, also based upon, you know, longer-term performance from one of your primary competitors. Why not make that goal, you know, 97%+? Maybe not every quarter, but, you know, across the planning period on average. You know, what holds you back from doing that? And then the second question was sort of already asked, but what, why is the, you know, leasing margin not a little bit higher of a goal than 38%-41%?
Okay. We will go ahead and start out with the operating margin and the question from there. Now, I'm forgetting the question when you get to the leasing. Sorry.
Yeah, I was just basically asking about the utilization goal-
Uh, utilization
T he 38%-41% margin goal.
Sure. So when you look at the cars, we said we have 15%-20% that go repriced. As you go through that process, some of those cars will come back. They'll have to go through a shop. They may have to have some work done on them before they go back in the fleet. So that time does go against the utilization. There's a lot of tank car work going on right now, and as the markets shift, you may have certain fleets out a little bit longer as we place them with new customers.
So 95%+ is an area we're very comfortable operating in. We think it's high utilization overall for our lease fleet, and of course, we're gonna try to drive that number as high as we can during the time. When it comes to the, margins on the lease fleet, I don't know if you want to add a little more.
Yeah. Yeah, so just recall on the margin, why it may be a little bit lower than you're traditionally thinking is that does include the maintenance operations business in those numbers, which does generate at a lower margin. If you look at kind of the pieces, we're expecting all of those same, all those margins to improve. As we were talking with Bascome, we talked about the gains on railcar sales being less than the prior cycle, so that would also set margins lower. But when you look at just the core businesses, we're expecting lease rates to continue to improve through the cycle.
We're expecting expanded revenue from our services. It'll be modest, but that will be an enhancer to margins. In the maintenance business, we're expecting those margins to improve, but those margins are lower than the average. So that will, all that kind of, when you stir it all up and it settles out, you, you get to that 38%-41%.
Okay, got you. Just to clarify a couple of things. That seems like the maintenance is maybe a couple hundred basis point drag-
Yeah
. even though it's small, but it's much lower margin.
Right.
And then on the utilization, you said you are comfortable operating at 95% plus, that you don't feel the need to sort of target a higher level, even though you'd like to be there, obviously?
. So what I said there was the fact that you have cars that are returned, that have to go through service, that takes that number down while until they go to a new customer. So 95% plus is something we're really comfortable with. But as always, we try to keep as much as the fleet utilized as we can.
Okay. Are there any big shifts that you're anticipating as cars come back, you know, for maintenance or are redeployed into other customers or commodity groups? Or is that just a general sort of placeholder-
That's-
For how you look at the-
That's a general placeholder.
Okay.
What we've seen so far is cars that have been returned. We've been able to get them assigned to other customers at a higher lease rate. So we're really happy with the dynamics out there in the leasing market.
Okay, thanks for taking all my questions.
Yep.
Good.
We have a few online.
Okay.
I know it's hard to predict because of mix, but what is the projected CapEx number for the three-year period?
Cap manufacturing, or non-leasing CapEx? I'm assuming that is the nature of that question. Yeah, we'll assume it is, since they're online. Similar run on maintenance, on manufacturing CapEx or all of our corporate CapEx, as the last three years. You know, it's been averaging at $40 million-$50 million. This year, we guided about $50 million. So I'd expect similar CapEx numbers throughout the cycle.
When you think about modal shift, what customers are likely to lead the charge, and what is the catalyst?
On the modal shift, I think it's the ones who are shipping the longer distances. So if you look at those cars that ship, trucks that go more than 480 miles, it's definitely more cost efficient to ship by rail. It's definitely more sustainable to ship by rail, so it's getting that market back. I think some of the railroads have taken steps. If you look at BNSF, they're opening distribution centers outside the congested areas where most cars go today. You're hearing the CN, or excuse me, the CP, also talk about doing that.
So as they look at how they can make it easier for those, rail cars to get to a location where it can be transloaded for the last mile delivery for customers who don't have rail service into their factories, I think you'll see the shift. As far as the customers, again, it's the ones with the heavy, commodities that go a long distance-
Got it.
It makes the most sense for them.
Yeah.
Are there any more questions in the room? Okay. Can you talk a little bit about the welding operations transitioning to robotics, what you're, what we're targeting there?
Sure. So in the past, we've had welding in very long welding operations, very fixed for tank cars. Lately, Kevin and his team have been working on some more modular welding, and these welding devices are very simple to train. You can actually take and move it for the path that you want it to go on. It can be used for subcomponent assembly. It can be used for single lines on a freight car, which we haven't done a lot of automated welding on. So the opportunities we see there are increasing.
We have some of these units in our shops right now, and starting to use those to see how far we're going to take that. But it gives us two, two things that it helps us with. One, quality is very consistent when you're using a robot. Number two, when you look at the demographics of available workforce over the next 20 years, they only continue to get worse. So we're looking for ways that we can help offset that by putting automation in place.
Yep.
Okay, I've got more. If economic conditions remain stable, how do you think about the normalized growth rate for the leasing segment when you factor in unit growth and pricing?
Got that one.
I didn't get the welding question, but I get that one?
Helping you out there.
So when we look at fleet growth on the fleet, think about that as kind of, you know, GDP plus growth. It's around 3% per year from a compounded annual rate. That's on our wholly owned fleet. We expect services and the parts growth will be at a higher growth rate, you know, approaching double digits. But that's mainly where we see the growth and investment. We also expect the yield on those assets will continue to improve, which will also provide some growth.
As I mentioned earlier, we don't see growth in the products in terms of overall revenue, because we expect a similar number. That may change year -to- year, depending on eliminations, but for the most part, it's the same market the next three years that we just came out of in the last three years.
Can you talk about the size and scale of the mobile repair unit business and the margin profile?
So on the mobile repair units, we have 37 units that are out there and operating currently. They're located regionally. Why? Because the cars that we see at the regional sites don't always go by one of our car shops. Again, that gives us an opportunity to control the repair on that car, to lower the cost for those repairs on that car, to avoid the freight cost, to send them to a shop, and to keep them in service longer, which helps our customers with their overall total cost of ownership.
Can you give an update on the secondary market and, how much strength there is in that market?
. How much what?
Strength.
The secondary market, it remains strong. Think about, we talk about there's not a lot of speculative building by lessors. One of the reasons is they're pivoting to kind of the more known quality of the secondary market. They don't have to speculate. In a world with higher interest rates and the backlogs extended, and on an uncertain economy, lessors aren't wanting to speculate on new equipment.
So we're seeing even the big lessors focus more of their capital on the secondary market. That's providing a very broad market in terms of potential buyers and sellers, and we're seeing it pretty deep as well. So, when you look at assumptions, we're seeing people model in future lease rate increases, so we're seeing a very healthy secondary market.
Are there any more questions in the room?
You know, to that point, on your returns models on the secondary market point-
Yeah.
I'm asking Majors here again. On your returns models, are you getting enough of the return in the first lease, where you don't feel like you're taking excess residual risk at asset prices where they are today? And, you know, is that driving the behavior from your customer, the fear of residual risk, or do you think it's just yeah, any thoughts on that longer term?
Yeah, great question, Bascome. You know, we have our hurdle rates, and our hurdle rates have residual assumptions. For us to put an asset in our balance sheet, it's got to clear that hurdle rate, which means we got to earn our residual. We got to earn our yield during the first term of the lease and with our residual assumptions. So we're not investing, betting on things to get better, 'cause the market's relatively good right now in terms of asset yields.
And so, that probably does have a little bit of a driver in that, in terms of, you know, I think with asset prices having come up so much in the last three or four years, you've got to, you know. While I think inflation is going to continue to be in the economy, I don't think we're going to have the rate of inflation we had over the last few years. So your residual assumption is important, but our assumptions assume we earn our yield and our residual over the first term.
Two sort of guidance clarification ones. Are you comfortable with the $1.35-$1.55 EPS guide? I'm sorry, if I didn't hear that earlier, so.
So we have not changed guidance from the first quarter results that we issued. If anything does change, that'll happen in future calls that we have.
And on the long-term guidance, the corporate expense line, or that's been tracking, what, about $110 million-$150 million a year.
Yeah.
Is that something that's going to be fairly steady, or do you think that would change in any meaningful way?
It shouldn't change in a meaningful way.
Um-
Anybody else? Okay.
All right, if you'll humor me, I've got a few more.
Let's go.
So Eric, in 2016, 2018, you worked with an activist investor on the board, you made some pretty meaningful decisions about how to refocus the business and spin off a lot of businesses that probably weren't core to what you're doing today, and, you know, that seems to have created a lot of value for shareholders that were around at that time. You know, with some distance between that period and decisions, can you talk about why ultimately it was decided to keep the manufacturing and railcar leasing businesses together at the time?
So-
You run, I'll go, you go, wherever.
Sure. So when you look at the business, we brought up several points in the presentation that we believe we have more touch points with that customer. When they're looking to either buy or lease a railcar, we're one of the places they can go to get information about both of those options. So we get early data about where the market's going, what areas you may see some growth in. When you look at the touch points we have throughout the life of that car, it gives us access to know what services they may need.
It also gives us access into the parts that they may need to keep that railcar in service throughout its life. All of those add value overall to our platform and allow us to get the feedback loop for the differentiation that we have with the asset. So we think it plays very well into our overall business. The other thing that we did during that time frame is, we took down the cyclicality. You don't see us chasing every order. We're being very disciplined on the orders that we take, for the company. We're making sure that we get a return that we deserve on those cars before we put them in.
And so we've been asked many times on earnings calls, "Will you chase if the orders go up to 80,000 for the industry?" And right now, staying in that stability range makes sense because we're a leasing company first. The returns on that lease fleet, keeping them utilized, and making sure that we can get the rates we deserve for those cars, is the most important area that we're focusing on.
All right, so I mean, that was a pretty good run-through of the logic today. Has. It doesn't sound like the logic of keeping the business together has evolved in any meaningful way in the last seven or eight years, or?
So we've looked at it. We, we go back and-
It's just something you evaluate every year, and-
Yeah
A nd how has that evolved, is really the point of the question, so.
S o the evolution is actually we're seeing it be more valuable right now, especially as we look at lease originations, which is something that our platform is very good at doing. We can originate those lease and then monetize them in our lease fleet, or we can go ahead and sell them to an RIV partner and get the maintenance long term. So we see it as setting up for long-term, profits or long-terms, revenue and profits for those cars. I don't know if you'd add.
I'd just add, we had, Mike Rath from Darling Ingredients kind of give his testimony unscripted, and, what he said, he looks for a builder, a lessor, someone who's got maintenance, all those things. Our business is centered around an industrial shipper, and they make those decisions where they're gonna buy or lease. When we're talking to our customers, we're talking about providing them railcars, not leasing a railcar or selling a railcar.
That's a different conversation than we would have if we were just manufacturing or just leasing. It's unique for us, and because we have a large fleet and because we can manufacture all those different products, you know, it's in our DNA. We know it's better, but we listen to our customers, and they keep telling us it's better, and they keep coming back.
Thank you.
Thank you. Jacob Moore, KeyBanc. On parts and services, what sort of growth does your 2030 target of $150 million assume? You, you mentioned the selling cycles are long, so it may be hard to displace incumbents, but with a pretty small share of a $4 billion TAM, is that a target area for M&A? And then finally, at what rate is that TAM growing?
So first, the $150 million is just services revenue for 2030, that we're looking to grow, and the market for the $4 million TAM is the services market. So as we look at growth overall on that, it is not linear. Again, a long sales cycle. We have some very good prospects going right now with large customers that I mentioned. We believe once others in the industry see their usage, it will help bring them along. I've seen similar types of moves, with autonomy in mining, where it was very slow to start, and then when it took off, it changed very quickly.
So we're setting up to be able to handle that change, but we're also setting up on our own lease fleet. So we're getting the benefits of what we're telling the customer they will get firsthand, and then can talk to them and show the improvement for their business. As far as the, growth metric, I don't know if you have the number.
Oh, as in the current period, we're looking at low double-digit growth, and I would assume that that kind of sticks through the period. You know, the numbers will keep getting bigger, but we see it'll be a higher growth rate than the rest of our business, that the parts and the services, the 150 is just around the service, but we think both of those, there are opportunities to grow at a, at an outsized clip.
Understood. Thank you. And then the last one for me is on capital allocation. I think it's fair to say that share repurchases are deprioritized for the time being, but that you'll be opportunistic. So if there was a market situation that presented a compelling opportunity, would you switch back to an aggressive share repo, or would you maintain the current approach?
Yeah, we're gonna do what's right where the highest yield is. You know, and so if suddenly we think the yields on lease originations are not hitting our hurdles, then we're not gonna do it. We'll do something else with that capital. It is discretionary, what we do, or we'll sell it into the secondary market or sell it in our RIV platform. If we thought there was a compelling reason to buy back shares, I think our track record speaks for itself, that we're willing to.
We spent over $900 million in the last three years to buy back shares. We'll continue to do that, and so I think you can trust us, and trust Jean, trust myself, trust our board, that we're gonna continue to make those right decisions.
Thank you.
Thanks. I know some of us are gonna be heading out to see one of your maintenance facilities this afternoon. Could you talk a bit about your improvements on the maintenance side over the last few years and, you know, what you're targeting prospectively, you know, where you stand in terms of the percentage of your lease fleet that you do maintenance on, and where you'd like to take that target, even if that's not part of the kind of explicit-
Sure
T hree-year targets?
So when you look at it, the team and maintenance has done a terrific job on improving turn times for the cars that are going through their shops. They've focused on making sure that they have the right parts there to do the work. If it's our own fleet, we can look at history and see what type of parts we need to go to that shop for the typical repair based off the age of the car. So all of those are great.
They've also been making improvements overall in their ability to process. From a sustainability standpoint, efficiency and safety standpoint, added automated cleaning, we call it TERSUS, in one of our shops already. It's starting to move out to two other shops currently.
That allows us not to put people in that tank car to do the cleaning, to get the commodity out, and allows us to do that in a quicker time period. You put all of that together, it's really the focus on making sure, again, we're meeting those customer needs to get that car back out, so they can get more turns through the year than they did previously. When you look at where we're looking at the growth right now, we're still saying 60%-65% of our fleet going through our own shops. We are increasing that number by MRUs.
MRUs can do things that are highly costly for us, like wheels, that you can do in the field, or it can do some minor repairs and save us, again, the cost for getting that to a shop and the out-of-service time that you would incur by getting it to a shop and through. So we think those all benefit us. The reason we're only at 60%-65%, a lot of the cars right now do not run by our existing car shops. As we continue to improve the overall turn time and cost to repair, we will look to direct out of route some of the cars in our fleet back to our own shops, but that's still a process that we're working through.
Yeah, go ahead.
Okay, just a couple follow-ups there. So when you're saying as you improve the, you know, time of repair, you can justify taking the car farther from its normal route into your repair shop as opposed to a third-party repair shop.
Yeah
I s that?
Not just the time to repair, the cost to repair.
Okay.
So as we look at it, again, we built the car, we know what it needs to maintain it, we've got history on it. So as we get better at that overall, and having that maintenance facility or maintenance shops reporting to leasing, very good conversations, very good planning on how things need to go through the shop, that all help improve our performance.
Just to also clarify, the 60%-65%, that's where you are now, or that's where you're targeting in the next-
That's the target.
Okay.
Last quarter, 50, 55?
Yeah.
50
Just late high 50s.
Yeah.
Yeah.
Okay. Thank you.
Go wrap up, or is there any more? Okay.
It's good. Well, Bascome has another one.
All right, I'm ready for you, Bascome.
Jean, one for you here. So you spent several years at Progress Rail before CAT acquired it, many more years there under CAT's ownership. I mean, they're in a lot of businesses, similar and adjacent to what you do here at Trinity. I mean, are the, are these guys in businesses that you're not in today, that you might like to be in in the future?
And, you know, irrespective of your experience at Progress, it, it doesn't sound like you plan to meaningfully expand the portfolio of rail-related services, you know, with, with transformational acquisitions. But just wanna get the thoughts of, you know, how, how, how the portfolio might look different in five years, say, than it does today at Trinity?
Sure. I have no indication that Caterpillar wants to sell any of those businesses. There are parts businesses and reconditioned businesses that I would love to have. If they ever decide to sell them, I would love to be in line for that. But again, we're going to look at the cost, make sure it makes sense for us, and the returns that we would get from those businesses before we would move.
Thank you.
Thank you.
Well, we wanna thank you for joining us today, either in person or online, and really appreciate the questions. If you have anything that you would like to follow up on, you can contact Leigh Anne Mann, or you can reach out to one of us. We do have our cards outside for those in the room. Thank you and have a safe, great day. For those in the room, please stay, we have follow-ups for you.