Good day, and welcome to the Trinity Industries 1st quarter ended March 31st, 2026 results conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions by pressing star 1 on your telephone. For operator assistance, please press star 0. Please note today's event is being recorded. Before we get started, let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and includes statements as to estimates, expectations, intentions, and predictions of future financial performance. Statements that are not historical facts are forward-looking.
Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain of the business issues and risks, a change in any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. I would now like to turn the conference over to 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 first quarter 2026 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 quarterly investor slides, which are accessible on our investor relations website at www.trin.net. These slides are under the Events and Presentations portion of the website, along with the first quarter earnings conference call event link. A replay of today's call will be available after 10:30 A.M. Eastern Time through midnight on May 7, 2026.
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 grew earnings per share year-over-year 10% in a quarter where revenue was down 16%. That's the operating leverage we've been building toward, and it shows up in a 24.6% adjusted return on equity over the last 12 months. Cash flow from continuing operations was $100 million. The business is performing the way we designed it to perform. Before I get into results, I want to recognize the team for closing a transaction after the quarter closed related to our railcar investment partnership with Napier Park. As a result of the transaction, approximately 6,100 railcars moved from our partially owned fleet to investor-owned fleet, and we took an 11.2% limited partnership interest in the Napier Park entity that owns the majority of Napier Park's railcar holdings.
We expect to record a non-cash pre-tax gain of approximately $130 million in the second quarter related to this transaction. This transaction highlights the embedded value of our fleet and is another step in simplifying our balance sheet. Based on strong first quarter performance and our outlook for the balance of the year, we are raising and tightening our full year EPS guidance from a previous range of $1.85-$2.10 to a new range of $2.20-$2.40. At the midpoint, this represents a 16% increase in our EPS expectations. Portfolio sales are an integral part of how our leasing platform creates value, and we now expect a higher level of gain on sale activity this year than we originally planned.
We expect full year gains to be in the range of $160 million-$180 million, which includes $22 million in the first quarter and approximately $130 million from the railcar investment partnership that we will book in the second quarter. Let me walk you through what we're seeing in the market. The rail economy is improving. Industrial production grew at an annual rate of 2.4% in the first quarter. The manufacturing PMI, a key monthly economic indicator, was above 50 for three straight months. That's the first back-to-back positive reading in over 40 months and has been expanding for 17 straight months. Inquiries have been trending up since the start of the year. Furthermore, railcars in storage moved below 20% as the industry fleet continues to contract and car loads rise.
The picture isn't all clean, however. Inflation is still elevated and employment has flattened. That continues to weigh on consumer-driven markets, particularly autos and intermodal, and tariff uncertainty remains. The direction is the right one, and we're positioned for it. I'll take you through both segments, starting with leasing and services. Leasing performed. Lease rates were higher, utilization was higher, and the segment delivered a 37.9% operating margin in the quarter. Revenue was down year-over-year, and the reason is structural. We closed a railcar partnership exchange in the fourth quarter, which reduced our consolidated fleet. Our own fleet ended the quarter at 101,960 railcars, down about 7% year-over-year.
The number that matters strategically is our combined owned and investor-owned fleet at 146,670 railcars, which is up 1.6% year-over-year. We are growing the platform and lease rates continue to rise. Renewal rates were 6.6% above expiring rates in the quarter. We continue to invest. Net fleet investment was $68 million in the quarter. Over the last six years, we've added more than 18,000 new builds and over 14,000 cars from the secondary market. We were active in the secondary market again this quarter, completing $83 million of lease portfolio sales. Fleet utilization improved to 97.3%. Renewal success was 60%, and higher assignment activity allowed us to place cars with new customers at higher rates.
The future lease rate differential, or FLRD, was a positive 1.2%. The FLRD has been positive for 19 consecutive quarters, allowing for continuing growth in lease rates and leasing revenue. The average lease rate continued to increase quarter-over-quarter and year-over-year. Rail Products is where the cost work shows up. We delivered 1,970 railcars at a 7.4% operating margin. On these volumes, that margin is a proof point. It reflects favorable Q1 mix, more importantly, it reflects several years of right sizing, automation, and breakeven reduction in this business. The cost structure has changed. With the remaining mix of car types to be built, we expect full year Rail Products Group margins to average 5%-6%. We received orders for 1,660 new railcars.
Both orders and deliveries remain within our usual market share range. Inquiries are accelerating. We're ready to ramp up when inquiries convert to orders. Backlog stands at $1.6 billion, just under half of the industry backlog. We're not going to chase volume at the wrong price. When the market turns, we'll be there. Here's where we stand. We did what we said we'd do this quarter. Margins held up. The fleet is in good shape at 97.3% utilization. Lease rates moved in our direction. Rail Products delivered a 7.4% operating margin on lower volumes, which is evidence that the cost work we've done over the past several years is paying off. The order book is the watch item. Inquiries are picking up. We're ready when customers are ready.
I'm proud of how this team is executing, and I'm confident in where we're headed. Eric will take you through the financials and our guidance for the rest of the year.
Thank you, Jean, and good morning, everyone. I will begin by discussing our first quarter financial highlights. Our operating margins expanded in both segments. Cash generation was strong at $100 million from continuing operations. Our business is generating good returns and is proving its ability to outperform the market through the cycle. We have $1.1 billion of liquidity, and we continue to return capital to shareholders. Let me walk you through the income statement, cash flow, and balance sheet, and then I'll cover guidance for the rest of the year. First quarter revenues of $492 million reflected lower external deliveries in the Rail Products Group. However, as Jean mentioned, GAAP EPS from continuing operations improved as compared to last year to $0.32, which reflects higher gains on lease portfolio sales and higher lease rates, generating higher operating margins.
We generated proceeds of $83 million in the quarter from lease portfolio sales and recorded a gain of $22 million. Moving to the cash flow statement, cash flow from continuing operations was $100 million, benefited from a reduction in working capital. Our total net fleet investment was $68 million in the quarter, which included new railcar additions, secondary market adds, and fleet modifications and betterments. This includes $83 million of railcar sales in the secondary market. Shareholder returns were $32 million in the quarter, largely driven by our quarterly dividend payment as well as share repurchases. For the three-year period, 2024 to 2026, we set a target for our cash flow metric, which adds cash flow from continuing operations and net gains on portfolio sales of $1.2 billion-$1.4 billion.
With 3 quarters remaining in the planning period, we expect to exceed this range. That is a significant amount of cash generation. We are constantly working to make optimal choices on how we grow our fleet and improve the returns of our business. Moving to our balance sheet, we have solid liquidity of $1.1 billion. The loan to value for our wholly owned fleet is 69.1%. It is worth noting that the market value of our fleet is much higher than the book value of our fleet. Our LTV is based on the net book value. The debt structure on our balance sheet gives us significant flexibility and liquidity as we execute on our capital allocation framework demonstrated by our latest financing.
After the quarter closed, we issued $481 million of ABS notes and used the proceeds to redeem $377 million in outstanding debt, generating approximately $100 million of excess cash and providing further evidence of our cash generation abilities. Now I'd like to give some updated guidance for the rest of the year. We expect industry deliveries of 25,000 railcars in 2026 and expect Trinity to maintain its historical share of deliveries. While there is still some available space to be sold for the end of 2026, current inquiry levels support maintaining this guidance. We are slightly lowering our expected full year net lease fleet investment to a range of $350 million-$450 million, reflecting expected higher proceeds from railcar sales.
As a reminder, this is a cash metric. This would not include the sale of railcars in the Napier Park RIV program. We are investing $55 million-$65 million in operating and administrative capital expenditures. As Jean mentioned, we are raising our full year EPS guidance to a range of $2.20-$2.40, a 16% increase at the midpoint. This comes from higher than expected gains in the railcar partnership transaction as well as higher forecasted gains from the secondary market. We expect full year gains to be in the range of $160 million-$180 million. Our first quarter demonstrates the operating leverage we've been building. The business is built to perform throughout the cycle.
Our disciplined cash flow management and optimized balance sheet give us flexibility in capital allocation and working capital management. Our lease fleet utilization is high, generating consistent, predictable revenue and cash flow. In short, our platform is performing, and today's results and 2026 guidance reflect our conviction in Trinity's ability to continue to generate above-market returns for our shareholders. Operator, we are now ready for our first question.
Anyone who wishes to ask a question may press star in one of their telephone The first question comes from Harrison Bauer, Susquehanna. Please go ahead.
Hi. Thanks for taking my questions today. Maybe just to start off with the gains. I mean, backing into what you did in the first quarter and what's expected from the transaction in the second quarter, there's only a range of $10 million-$30 million in terms of gains for the rest of the year in the second half and maybe excluding the deal in the second quarter. Could you maybe walk through where you think there might be some declines in secondary market activity? Like, what's maybe one of the reasons why that you would expect lower gains in the second half of the year, potentially?
Good morning, Harrison. This is Eric. I'll take that. As you know, the gains can be a little lumpy, and certainly in the second quarter, with the Tribute transaction, they will be a little lumpier. You're right. In terms of the guidance, it does imply a lower level of gains in the back half of the year. I'd just say, you know, it is still a very elevated number. We are really focused on our net fleet adds and our growth of our fleet, and we're in the range or the upper range of our 3-year target. We did bring that down this quarter by $100 million, which reflects a little more selling activity out of the portfolio.
Most of the raise is certainly attributable to our outlook on gains going forward. Overall, the secondary market is still strong.
Understood. Can you give us maybe a sense of where that transaction with Napier Park ended up relative to your initial expectations in terms of either the structure or the amount of the non-cash gain that you expect?
First on the structure, the structure is a little different than the last one. We took a 11% interest in all of the Napier assets. They're both structured as non-cash. Certainly, we like having that alignment of that interest in the broader portfolio. It'll be a little different accounting. It'll be equity method accounting going forward, you won't have the minority interest. From that standpoint, it'll simplify things. In terms of, you know, our expectations, you know, in our fourth quarter earnings call, we signaled this, it was included in our guidance, we certainly didn't have anything completed at that point.
Part of the raise is attributable to higher gain with the Napier Park transaction. It came in a little better than we expected, and that was just through our negotiations.
Great. Maybe just shifting to the FLRD. Obviously that number, you know, trended down a little bit. You know, it is forward-looking, but then there are some mixed dynamics. Could you maybe paint a picture how you would expect or could expect earnings in the leasing segment to potentially grow, even if your renewal rates tend to flatten out? You've called out some cost pressures in that business. Maybe if you can offer how you would expect the FLRD to maybe trend with gains or level of secondary market over time if a stagnation in that number might also correlate with some just general lower secondary market activity.
Sure. I'll take that one. When you look at the FLRD, we stated it had been positive for the 19 consecutive quarters, and so that's a good trend. Utilization went up to 97.3%. Cars in storage went down. Inflation is still high. Overall, the parameters around our lease rate are still positive. We had a 6.6% uptick in the renewal rate versus expiring rate in the quarter. Our average lease rate went up quarter-over-quarter and year-over-year. All of those are still trending in the right direction. In the first quarter, we did have a little bit of the mix that affected us. If I was a betting person, I'd bet we're gonna beat that percentage going forward.
It really comes down to the mix of cars and then what's expiring in the next four quarters. Sometimes the mix helps us, sometimes it brings it down a little bit. We still see headroom for increasing the overall lease rates, especially since new car costs are continuing to be elevated, and that gives us some of that headroom.
Okay, great. Thanks for the color. Maybe just to close for me, just shifting over, and you mentioned elevated new car costs and shifting over to the manufacturing segment. And it's nice to see the results strong there in an elevated or in a lower rather, delivery environment. Could you maybe give us some updated thoughts around the recent Section 232 tariffs on full value of imported tank cars? What are the implications for your business if there's any costs associated that are factored into your guidance at all?
Maybe just with that, if you can update us on your tank car production mix, how much of it might be produced in your Longview plant versus Mexico, and just any general thoughts around your tank car production and what this potential tariff might mean for your business. Thank you.
Sure. We've been dealing with the uncertainty of tariffs for a while now, and the team has gotten really good at looking at that. We'll continue to look and see what may affect us, how it may affect us, and adjust what we're doing based off of that information that we find. Uncertainty remains, don't see that going away. Just know the team is on it, and they've done a great job so far working on that. We typically don't disclose what percentage of cars are being produced where, we're not gonna do that. We're still continuing with the 25,000 industry deliveries for the year and our portion of that in our normal range, which is somewhere between 30% and 40%.
not a lot of major changes on that.
Thank you, Jean. Thank you, Eric. I'll hop back in the queue. Thanks for the answering questions today.
Thanks, Garrett.
Thank you.
The next question comes from the line of Andrzej Tomczyk, Goldman Sachs. Please go ahead.
Hey, thanks, everybody. Morning. Just kind of curious on leasing to start out. First, maybe just more broadly in the context of a potentially sticky inflation environment, particularly given higher energy prices globally more recently. How do you communicate with customers who lease rail cars from you currently, you know, the asset prices are higher? Are you thinking ahead to the next wave of resigning leases and expecting another positive cycle of growing lease rates and positive to potentially re-accelerating that FLRD?
Okay, Andrzej, I'll take that one. Well, the last question I did say if I was a betting person, I would bet it'd be above the 1.2%. It really comes down to the mix in that quarter and what it's going to show. When we're looking at overall the environment, again, the metrics are in favor of being able to continue to raise the lease rates. We are lapping some rates that had already been raised during this time period, during that 19 consecutive quarters of positive FLRD. We got to keep that in mind. Overall, all the things we're looking at, agriculture and energy markets are really strong. If I look at some of the weaker markets in chemical, it's weaker not from car loads, but it's weaker from their margins.
There's a little bit of weakness there. Consumer products, which we don't have, a lot of cars in our fleet that are the, consumer-facing type products. Overall, when we look at our mix, we still see an opportunity to raise those rates.
Andr, I'd just add, you know, the energy prices you're alluding to, I'm assuming is related to oil and what's going on in Iran. While that is starting to come through in some of our supply chain costs, it probably hasn't worked its all the way through. If that continues, that, I think you're leading to that could be a next wave of inflationary pressures, and it certainly could. You know, the interest rates are starting to signal that as well with what treasuries are doing. The fleet remains very tight. It's in balance. That would, you know, that will start to potentially price through in the future.
Understood. I think last call you talked about the market value of your fleet and that that's, I think, 40% to 50% above book value. Any updates to those numbers? The other question there is, have you looked at that historically to determine, sort of on average, how much the market values exceed book values? Just trying to get a sense for, you know, market value versus book value this cycle, you know, how that dynamic might be different.
Andrzej Tomczyk, this is Eric. Last quarter, we talked about it. Our estimate was 35%-45% higher than our carrying value. We have not updated that view. That is still our view. In terms of If you go back over the last 4 or 5 years, you've had more inflation in this industry than if you go back, you know, the prior 5 years. It probably has accelerated. I haven't gone back and back tested it, but certainly it has trended higher, the inflation rates. Just to mention, with long term, we see 3%-4% inflation in railcar asset prices. Long term, we've seen lower inflation in lease rates at 1%-2%.
That does imply that there is still a lot of room for lease rates to catch up, if you will, to what we've seen on the asset side. Certainly, financing costs and treasury rates certainly support our view that will happen over time.
Understood. Just on that last point, on leasing, how are you thinking about the spread sort of between lease rates and your cost of capital today, and maybe looking forward, how that's influencing your appetite to grow the lease fleet?
Yeah, I don't think we are always evaluating our hurdle rates against our weighted average cost of capital. It's, you know, it changes often with the volatility you've seen, especially in the treasury rates. In terms of the spread over our weighted average cost of capital, you know, we're being fairly consistent around that. It may vary by different car types, but we are certainly seeing that and we're seeing fairly disciplined lease pricing in the market. That's been good.
Okay, got it. Maybe shifting gears a little bit to the manufacturing side, it did seem like a really nice margin performance there despite volumes down 36%. You improved EBIT margin 120 BPS year-over-year. Could you just talk a little bit more about the cost takeout initiatives there as to what's driving that? Also maybe why you would still expect the 5%-6% full year average margins given the sort of 1Q outperformance there?
Sure, I'll take that one. First on the cost initiative, team's done a great job for several years working on continuous improvement, reducing setup time, automation that we're putting into the facility. All of that comes together to help us with both efficiency and overall productivity for those facilities. That work continues. We're always looking to see what else we can do, help us from the safety and productivity standpoint. When you look at Q1, we had some favorable mix. We had more specialty cars that we produced in that quarter. Second through the fourth quarter, we're expecting more standard, so less specialty cars that are going to be produced.
You know, looking at, where we're at, 5%-6% performance at these volumes shows a structural change in our facilities and our ability to produce. That is something I'm very happy with and something that we've been talking about for several years to you all about things we were going to do. It's lowered that break-even cost for us. I think the operations, Rail Products Group is performing very well. When we get some volume back, I think you're gonna see that leverage come through.
Understood. Thanks for clarifying that there. Just on the headcount, I was curious on in manufacturing. I know that doesn't get talked about often on the call, could you maybe talk about where headcount is at today versus maybe, say, the peak? Then following onto that, was curious to know what the lag might be to hiring and bringing new labor online relative to when you sort of see orders and backlogs start to improve.
Sure. Couple things. Typically, when orders or backlog come up and the production rate has to improve, we'll go to overtime to start with, and that's about a 20% to 30% uptick that you can get from that. The other good thing we've got in our favor is during the downturn, a lot of the employees, many of them said that they wanna come back. When we start rehiring, we'll go to those employees first. Now, that doesn't mean they come in and they're 100% productive right away. We'll have to go through some retraining. There will be, you know, the time to get their efficiency back up as they get used to where they're working on the lines. We think we'll have a easier time getting those employees and getting them back into the factory.
We see the ability to move a little quicker than we did coming out of COVID and getting production rates up. When you look at where we were several years ago, I'm just gonna do total employment for the company. We were about 10,000 employees, and right now it's closer to 6,000 employees. A lot of that would've been in the production space in that change, in that swing. Some of that, again, though, coming out of COVID, was new employees coming in who had never worked in the industry. You had to hire more to get over that efficiency and productivity increase that we needed. I think it'll be less than that as we ramp back up for the next increase in volume.
Understood, and appreciate the color there. Maybe just for me to close off, 2 final questions. One was just, what's the earliest sort of indicator that you guys are watching internally that would tell you demand is going to inflect you know, either positively or negatively soon? Hopefully positively. I know ISM has done better recently, maybe historically that's a good indicator. Anything just specific that you guys are tracking, wanna call out? That's the first. Secondly, just looking ahead, the $160 million-$180 million of gains this year, is that sustainable sort of on an annual basis if we look beyond 2026? Thanks, everybody. Appreciate the time.
Sure. You mentioned a couple of the key metrics we're watching, but utilization is one. The tightness in the market overall, so for the industry, cars in storage. When you go to the inquiry levels, and we were positive, since the first of the year, inquiry levels have ticked up. Now they do have to convert to orders. The first quarter we had saw some of that conversion. We're having positive conversations again this quarter. Looking at that, we see positive signs that the volume could move. When you look at PMI, when you're looking at the manufacturing indexes, we closely follow that. All of those are good indicators for you to watch to say we think things look positive.
We still have to see the order rate get up to get us back to what we thought next year might be closer to 30 or 35,000 industry builds. When you go to the second question.
Gains.
Gains. Okay. On the gains, we're not gonna talk a lot about 2027, but when you look at the fact that selling in the secondary market and buying in the secondary market are integral to the way we run our business, I would expect that you're gonna see us in some form doing both of those every year. When we get closer to 2027, we'll give you more guidance on what we think will happen in 2027.
Jean and Eric, thanks so much for the time. Appreciate it.
Thank you very much.
Thank you. That was the last question.
Well, thank you for joining us today. Our first quarter results highlight the operating leverage we've been building and the progress we're making across the business. We remain focused on what got us here, disciplined execution, delivering for our customers, and creating value for our shareholders. Thank you for your continued interest in Trinity.