Everybody, thanks for joining us. We're excited to get started with day two of the conference. Yesterday was a really good and successful day. Appreciate everybody's support, and we're looking for an exciting day two and are very pleased to be starting off with Trinity this morning. From the company, we have Eric Marchetto, who's the Chief Financial Officer. First off, Eric, good morning. Thank you for joining us.
Good morning. Thank you. Thanks, Chris.
Absolutely. It's my pleasure. I guess maybe let's start sort of big picture. We always like to sort of get a bit of a lay of the land of how we're thinking about things from a macro perspective. Maybe we can start just big picture, how you're thinking about the world that we're in right now. Obviously, ISM has started to look a little bit more positive over the course of the last several months. We have seen some other freight indicators that are looking a little bit more constructive, whether they be carloads or some stuff that's happening on the LTL side. Maybe just big picture, how are you seeing the world? Then we can dig into the businesses themselves.
Sure. Yeah. Great. Similar view that we are seeing, as you mentioned, ISM. We're seeing rail traffic, in our sector. Pick up modestly, kind of showing some good growth. When we drill down and look at everything kind of industrial production as a big driver for us is U.S. industrial production. We are seeing healthy signs both on the employment side and some of the survey data. From that standpoint, it's been good.
Okay.
There's still a cloud of uncertainty in the market, especially in the U.S. industrial economy, everything outside of data centers and energy. There's still some uncertainty there. Prices are higher. We've seen a lot of inflation pull through in the new car market. That has made the existing car market more expensive as well. It's hard to tell if people are waiting for prices to alleviate or if it's just the uncertainty. We're still seeing with all the tariff changes that there have been, weekly changes in tariffs. We're seeing our industrial customers with a difficult time planning, making CapEx decisions. The result is they tend to hold what they have.
Yep.
Kind of freeze. It's kind of like driving in the fog. You just, you wait.
Yeah.
People are waiting it out.
Got it. Let's talk a little bit about the businesses. You do both the railcar manufacturer, you're also a lessor. I guess maybe talk a bit about the synergies of those two businesses. What's the value of the platform together?
Yeah. Well, we do talk about it as a platform.
Yeah.
Really when you look at it, my belief is that by having a large leasing business and a large manufacturing together, along with our maintenance services, we also have some other logistics services that we offer. All of those things when you put together give us a very strong view of the market. I would argue it's the best view of the market in our space. It's because we serve both railroads, lessors, and industrial shippers. Our platform predominantly serves industrial shippers, but we sell direct to leasing companies. We sell direct to Class I railroads.
We lease to Class I railroads. We sell to industrial shippers. We primarily lease to industrial shippers. All those things mean we see a lot of opportunities, we believe we see changes in demand, inflection points, and we have very good market knowledge. All that gives us a good reach. We're able to serve our customers well. Having the manufacturing and leasing together also gives us the ability to originate content.
Yeah.
Which is a real differentiator for us. Having those things together, we originate a lot of new railcar leases, but we're also pretty active in the secondary market, both buying and selling in the secondary market. For a lot of the other lessors, the primary market has turned to the secondary market just because of everything going on in the primary market. We're seeing a lot of lessors really look for existing railcars, and we're able to serve them through our fleet there as well.
It seems like the shift has been more to the leasing side and services and a bit away from manufacturing. I think I understand the logic there, but maybe let's walk through kind of like the strategic thoughts behind that shift towards lease.
Yeah, sure. When you look at our balance sheet, our capital is predominantly in the lease fleet.
Yep.
It stands to reason that where our capital is, we've shifted our focus more to the emphasis on the lease fleet. Those are long-lived assets, 40, 50-year assets, it's really about protecting that residual value, making sure the supply-demand stays in balance. We have some level of influence on that with having a manufacturing arm. All of our demand goes through our lease fleet, we were not going to build a new railcar unless if we have it in our existing fleet.
Yep.
The result is probably on the margin, a little more efficient market player. 20 years ago, we may have built a railcar that wasn't needed in the market because we didn't have it in our lease fleet. Today, because of our large lease fleet, 150,000 railcars that are either owned or we manage through our RIV investors, that gives us pretty good market presence.
Yeah.
It's a more efficient model. It's much more efficient to lease an existing railcar than build, invest in a new one. The proof should be in our return on equity through the cycle, we've produced some really good return on equity through the cycle now.
What is the sort of goal? What's the optimal mix of the business, do you think, whether it be in the next couple of years, longer term, near term? How are we thinking about that?
We have a goal. We did an investor day a couple of years ago, and we talked about what we'd characterize as modest fleet growth, adding $750 million- $1 billion of net fleet growth over the three years. This is the third year of that target, and we're right on pace to come in in that range.
Yep.
We're pretty disciplined when it comes to that capital allocation. We want to grow our fleet, but we want to be smart about it. The returns have to be there. Because that's really the only time you have an investment decision on these rail cars is when it's new.
Yep.
After that, it becomes more like real estate. You're trying to maximize the revenue. We try and be very judicious with our investment decisions, and that's kind of where we are right now. We expect to continue to grow it. There's good returns in the business. The returns aren't there, we'll pivot and change our capital allocation strategy.
That few $100 million a year kind of pace that you've been on, is that the right way to think about the go forward?
I think if the returns are better in there, it's a pretty small market right now.
Yep.
We're in kind of a down cycle. We're building less than replacement level. We certainly, if you get back to normal replacement level or even a little bit of growth, I could see that investment growing from there. That's kind of where we are at the bottom of the cycle, in terms of fleet investment growth.
Okay. Let's talk a little bit about the end market. I'm curious from a railcar type or where there's opportunities, where's strengths, what's strong, what's weaker-
Yep.
...in this environment.
Just to frame it, we look at the market in five broad segments.
Okay.
Chemical refined products, energy, agriculture, metals and mining, and then consumer auto. When you look at our lease fleet, it's really those three markets, the chemical refined products, energy, and ag, that we predominantly do full service leasing. That customer base, on those three segments really value the full service leasing.
Yeah.
That's where most of our fleet is, but we serve the whole market. Where we see demand, we are seeing some growth with metals, things like that, all the data center growth.
Sure.
That sort of thing. The agricultural side has been resilient. It hasn't been great, but it's been steady.
Yep.
The chemical side we've seen, coming into the year, they had a lot of margin pressure, I think, with what's going on in the Middle East. There's been more volatility there, but they've probably done a little better-
Yeah.
...as a result of that. On the energy side, people from 10 years ago always think when it's rail, on the energy side, it's crude by rail. It's really more a lot of those refined products that we're seeing. We are seeing good demand on the refined products on the energy side.
Okay. That makes sense. I guess, can we talk a little bit about lease rates and how you think about the trajectory of lease rates?
Yeah, sure. When you talk about inflation in the U.S. economy and in the broader economy, we talk about 40- 50 year assets, these are real assets. With all the tariff policy, you've seen U.S. steel increase a lot. A rail car is predominantly made of steel, whether it's-
Yep.
...steel plate or cast products, it's all steel derivatives. We've seen inflation in new rail cars. Over a long period of time, over the last 20 years, we've seen about 3%-4% annual inflation in new rail car prices.
Yep.
We've seen 1%-2% inflation in lease rates over that period. My belief is there's some catch-up that's needed. Where we are in new rail car prices, there's still a lot of inflation coming through. Labor costs aren't going to go down, energy costs aren't going to go down-
Yeah.
...steel costs probably aren't going to go down. Their backlogs are strong. That makes new rail cars that much more expensive. Factor in where Treasury rates are, where funding rates are, that makes lease rates on new rail cars more expensive. That allows that existing fleet, it provides a gap that your existing car fleets are here and new cars are here.
There's a bit of a gap that you can close. 10 or 15-year-old rail cars, our fleet is 14 years old on average, has very similar utility to a new rail car. It stands to reason you'll be able to price that up. That takes time. Generally, we reprice about one sixth of our fleet a year. We have a metric that we call our Future Lease Rate Differential, that has been double digits for the last four years. It dropped down to single digits the last two quarters. I think that's more of a pause than a trend-
Okay.
...because of everything else we're seeing in the market. I would expect lease rates to continue going up from here in the aggregate. There'll be certain car types that are softer than stronger, in the aggregate, I would expect that inflation will pull through.
How does utilization sort of play into this? I think last year it was 97.1%. How do we think about that and the interplay with lease rates?
There is certainly an interplay.
Yeah.
Utilization has held on. It's improved. At the end of the first quarter, it was 97.2 3%.
Okay.
That's held on nicely. There is always a play. We really look at the overall yield in the fleet and make sure we're improving the yield in the fleet. Utilization's important because if you get cars back, it's generally there's a maintenance event, you have to re-market it. We have been very successful in assigning existing railcars when they do come back and getting them back in service and thus maintaining the utilization the way it is. Really, we're looking at the overall yield on the fleet and how do we keep improving the yield on that asset.
Yeah, that makes sense. I guess, I'm curious about the Napier Park transaction. Maybe we could help kind of walk through a little bit there and what the opportunity, I think, comes from that for you guys as we look forward.
Yeah. Great. The Napier Park, we have in other asset classes, they'd call them sidecar investments. We have what we call our rail car investment vehicles, which is passive capital that wants to own rail cars without building out the infrastructure. Napier Park has owned a fleet of rail cars that we've managed, back since 2012, 2013. That was fund capital, private credit capital. Their fund was getting at the end of life. They were raising a new fund, more of an evergreen fund that's probably a better owner of these railcar assets because of long lives.
We were also an owner of those assets, roughly about 40% of those assets. We consolidated them on our balance sheet. The result was we never booked any profit, manufacturing profit or gains from selling those railcars to them because they were all consolidated in our fleet. Back last year, they raised a new fund. We had a lot of control rights in that fleet. The control rights was not going to be conducive to the new fund, so we contributed those railcars into their fund. There was another portfolio that we also owned 40% of. We took 100% of that, so we effectively traded.
When we did that, the railcars that left our balance sheet, there was a lot of pent-up value in those. We transacted at market value. The result was $190 million gain that we realized in the fourth quarter of last year. Those railcars went into the new fund. The other railcars went wholly owned on our balance sheet. Fast-forward into the second quarter of this year, there was another group of railcars that we did the same thing for. We contributed those railcars that we owned 40% of, took an 11% interest in all of their railcars.
Yeah.
About 30,000 railcars. We realized a $130 million gain on that. At the end of the day, what we have now is roughly 50,000 railcars that are in our managed portfolio that we have an equity interest in, but it won't be consolidated. We will recognize the income on more of an equity basis accounting on our 11% or on our partial interest in those railcars, and we manage them. We manage them as one fleet.
We are blind ownership. We market those. It's just part of our fleet. It's got our marks, one contract. The result is we get fee income, and we get some of the residual income from owning our 11%. It simplified our balance sheet. We had a lot of partially owned assets and partially owned debt. From that standpoint, and minority interest which not everybody has minority interest. We simplified the balance sheet from that standpoint. We think it cleans up the story. At the end of the day, what it demonstrated was there's a lot of value in our railcar fleet. We put our railcars on our fleet at cost, at least the 90%.
Yep.
That we manufacture in our fleet. With a 15-year-old fleet, you see I've talked about 4% inflation a year in railcar assets. You depreciate them over some time. The economic depreciation is a lot less than the book depreciation. When you fast-forward to today, we think the value of our fleet is 35%-45% higher than the carrying cost of our railcars, and we can realize that. That should come through higher returns with a lower basis in our fleet, or when we sell cars, we'll have probably a little higher gains than-
Yeah.
...most would have. Don't read too much into that, but I think it surprised people that there's so much value there.
I guess maybe this is a combo question here. Is there more to be done with third-party capital? Are there more opportunities for you to do this? Obviously, that 35%-45% seems interesting.
Yeah.
There may be opportunity to monetize that. How do you think about that?
Yeah. The 35%-45% is the railcars on our balance sheet-
Yep.
...that we own. Railcars are an attractive investment.
Yeah.
It's a long cycle too. We have a few partners that we work with that want to own railcars but don't want to build the infrastructure. By doing this and also with the Brookfield, GATX, Wells Fargo combination, I think that's opened eyes to other capital coming into the space.
Yep.
We certainly are having a lot of conversations with folks. It's a long sales cycle to say the least.
Yeah.
It's highly structured. The fundamental, I think, the big takeaway is these are attractive investments. You've got capital in the market looking for yield, and railcars offer some nice risk-adjusted yields. There should be more to come from them.
Okay. I guess maybe if we can think about sort of how you think about debt ABS versus maybe other opportunities for you. How do we think about where your debt levels are today, what you maybe want them to be or what you think could be a target over time, and then the products that you're kind of focused on?
Yeah, sure. We hit the capital markets two different ways. With our lease fleet, we hit it through the ABS market. That is non-recourse debt. The leases are a very good way for us to access the capital markets. We generally access the capital markets through that market as a AA issuer.
Yep.
We've been an issuer in that space since 2002, long history there. We're able to get pretty good access to funds by accessing it as a AA. We also access the market as a high yield issuer, BB+ credit. There is a differential. The ABS market is generally about 75 basis points- 100 basis points of more attractive. That comes with some structure, but that structure is pretty normal for us. From that standpoint, it's good, but we also see the high-yield market as an opportunity to continue to access. There's a little more flexibility in the high-yield market versus the IG market, so we like that as well.
Most of our debt comes through the ABS market. In terms of debt levels, we look at it two different ways. On the ABS side, we look at loan to book value. We're running right around 70%, 69%, 70% right now. Our range is 60%-70%. You access the ABS market on more of an appraised value and income approach, so we certainly could raise that. We've got about $900 million of unencumbered equipment on our lease fleet, but we really don't see a need to do anything with that.
We've got goals that we've talked about, 60%-70%. We're going to stay in those goals. When you look at more on a consolidated basis, we look at debt to total capitalization. We're running right around 81%, 82% there. Very comfortable with the amount of debt we have on the balance sheet. The result is we keep paying the dividend, raising our dividend, and buying back shares periodically.
Okay. Just to wrap up, I know we talked a little bit about pricing, and I think it's come down a little bit the last couple of quarters. You think we'll stabilize.
Yep.
Do you think we'll start to see that moving up as we go forward the next few quarters?
I think the underlying trends are there's still inflation in the market.
Okay.
Especially with what's going on in the Treasury market. They're 450+ today on the 10-year. Earlier in the year, it was 420.
Yep.
Four, even four at one point. I think you'll continue to see some inflationary pressures in the existing car market.
We did a survey yesterday morning, and I think the consensus is for a 25 basis point hike as we get a little later on in this year, so we'll see where those numbers go over time.
That's shocking how fast that's turned.
Yeah, how it's changed. Exactly. That's right.
Yeah.
Consensus has moved a little bit here.
Yeah.
That's fantastic. Let's pivot a little bit to the Rail Products Group, and maybe talk a bit about manufacturing. Let's talk a little bit about the delivery pace for this year and maybe your early thoughts on what you might expect for next year.
Sure. Just framing the overall market, we would say a normal market's around 40,000. We did our three-year look a couple of years ago. We put out guidance that we thought the industry would do about 40,000 a year. Last year, we did about 31,000. A lot of that was all the macro uncertainty. This year, we expect to do about 25,000.
Yep.
Another step down of 20%. Pretty dramatic. If you think about other industries, 20% down year-over-year, there'd be people in front of Congress looking for bailouts.
Yeah.
Not in our industry. That's our normal.
Okay.
We expect about 25,000. That is well below replacement level. We'll scrap probably 35,000-40,000 railcars this year as an industry. That fleet will remain tight, especially with railcar loadings improving. It should get back to 35,000-40,000 railcars within the near term, and we expect next year you'll start to see that. We haven't really seen the order intake to support that-
Yep.
...inflection point. I'm looking for that later this year, hopefully. It's taken longer than I've expected, just because the uncertainty has lasted longer than I expected.
Yeah.
At some point, it's got to come back. What I'm really pleased with on the manufacturing side is even at these low levels, we've produced some pretty good margins. In the first quarter, our Rail Group margins were about 7%. We've got a guide of five to six for the year in our Rail Group. At these low levels, being able to produce solid single-digit margins, I think is a testament to the work that the team has done on taking cost out. As the volumes come back, we see a lot of operating leverage in the business, and we would expect those margins to improve pretty dramatically as the volumes come back.
How do we think about tariffs here? We got the Section 232 tariffs. I guess, how do you think about that in the context of tank cars? What do you think your exposure is? What can you guys do for mitigation?
Yeah. The one thing I know is the rules keep changing.
Yeah. That's for sure.
And so-
We're trying to keep up
There are new 232 tariffs for tank cars that make entry into the U.S. Our tank cars do not make entry into the U.S.
Okay.
We're trying to get clarity from CBP on what all that means. Right now, we keep working to get clarity. It just adds to the uncertainty. I think what the result will be, people will pause on making investment decisions on tank cars in the near term, just because of the uncertainty. We're certainly hearing that from lessors-
Yeah.
...as we call on them. On the freight car side, we're seeing a modest pickup in the demand there. Hopefully, that's a sign of things to come. The only thing I can say for certain with tariffs is they're going to change.
That's for sure.
Between now and our conference call, they'll change.
Okay.
More to come.
They're not making entry right now, I guess is your point, right?
Right.
There is a little bit of that distinction versus what's been stated.
Exactly.
Okay. All right. That's helpful. I appreciate you giving us that color. You noted this sort of inflection in numbers on the manufacturing side that you're expecting. What are typically the benchmarks that we should be watching for that'll give us some clarity that this is actually happening? We talked earlier about ISM and overall industrial activity. I don't know if that's a correlation that we should be particularly focused on, or is there something else?
ISM is a good metric. Also, just we look at rail traffic.
Yep.
Rail traffic is, even for those outside of the rail space, it's great data because it comes in weekly.
Yeah.
It's effectively real time, and it's across a lot of different markets. When we look at that rail car data, and we do some other stuff with the data. We see kind of a supply-demand balance, and we can look at things like that. Also, our inquiry levels.
Yep.
We look at our inquiry levels, and our inquiry levels are supportive of, we're starting to see things coming. The counter to that is people are taking longer to make decisions.
Okay.
That just speaks to the uncertainty, which is code for tariff talk.
Yeah.
It's difficult to plan. I thought with the midterms coming up, we'd get more clarity, we've probably gotten a little less clarity.
Yeah, no, it seems like the tariff stuff took a pause for a period of time earlier in the year maybe has come back a bit more recently as a source of that.
We at least got numb to it.
Yeah. Maybe. That's certainly possible. We spent a lot of time working on a lot of brain damage last year, that's for sure. Inquiries to orders, that conversion process, how does that typically play?
Yeah, typically, it's fairly predictable.
Okay.
Lately, there's been a little bit of more of a pause on it that's extended a little bit-
Okay.
...in terms of, it just talks about what you just talked about. It's softer now in terms of converting those.
Okay.
Both on existing cars and new cars.
Got it. I guess, you took up guidance decently in the first quarter. I think that's higher gains, but then you got secondary market sales and the deal. Can we disaggregate that and think about sort of the gains, you have the deal and then underlying business and think about sort of what the key drivers are of the upside?
Yeah. The upside is primarily the gains.
Yep. Okay.
When you look at the underlying business, we haven't seen a lot of change in it from our original guidance in February.
Yep.
That's good-
Yeah.
...because we had still a lot of railcars to sell to hit our guidance this year.
Yeah.
They've kind of come in as we've expected. From that standpoint, that's been kind of no change is positive, because things are coming along. On the gain side, they can be lumpy. They can be opportunistic. It's a very robust trading market right now.
Yeah.
As I mentioned, most of your other independent lessors are sitting out the primary market, and they're focused on the secondary market, which means it's a pretty deep, broad market in terms of buyers and sellers. There's a lot of activity there. We access it both on both sides of it. We see opportunities on both sides of it. That's probably where there's more variability. Within the business, you'll get some variability quarter-to-quarter, especially on the maintenance side.
The fleet, it's all full-service leases, large tank car fleet, so compliance, it's predictable on an annual basis. It's not as predictable on a quarterly basis. You'll get some variability there. In the lease business, it's fairly predictable. I talked about 15% of our fleet up for renewal on an annual basis. That means 85% of it isn't. Contracted cash flows, we ought to be able to project those pretty effectively. There's a lot less volatility there.
That sort of speaks to the normalized earnings power. That's the way we should be thinking about the algorithm there.
Right.
Okay. That's super helpful. Okay. If there are any questions from the audience, feel free, raise your hand. We'll get you in there if you have any questions. I think you talked about $1.2 billion-$1.4 billion in cumulative cash generation over that 2024- 2026 sort of planning period, I guess. How do you think about deployment? We talked a little bit before about maybe where the investment opportunities are coming, but how do you think about that between sort of the fleet, the secondary market, and-
Yeah.
...working on the debt and sort of all the
Yeah, that's the beauty of this business. It generates a lot of cash flow.
Yeah.
It's fairly predictable. What we're going to do with that cash, that $1.2 billion-$1.4 billion, first we're going to invest in the fleet. That's the $750 million-$1 billion of net.
Yep.
That's before you finance it, so you can leverage that in where it's not $750 million-$1 billion of cash.
Yep.
We pay a dividend of about $100 million a year. We've grown that dividend for seven, eight years straight. Healthy dividend. On the debt side, our ABS debt amortizes monthly. There's always some cash flow that's going to pay down debt. When we refinance railcars, there's usually you get more cash out. That will continue. Overall, I don't expect big changes in our leverage profile. We'll opportunistically buy back cash, and we'll opportunistically look at M&A opportunities. M&A opportunities probably more on the fleet side than other operating businesses. We've bought a few over the last few years, and we'll continue to look at other kind of bolt-on adjacencies that'll just round out our platform.
Does this feel like a better or worse M&A environment than what you've seen in the last several years?
There's probably a little more realism in the bid ask.
Yeah.
In the last couple of years, people remember those multiples from a 2% or 3% interest rate environment-
Yeah.
...not from a 4%- 5% benchmark. I think people are starting to realize, and I think also what you mentioned earlier, if people's outlooks are interest rates are going to go higher not lower, today may be better than tomorrow.
Yeah. Absolutely.
That will probably lend to a little more tightness around that bid-ask spread.
Yeah. No, that makes sense. Okay. I guess maybe to wrap up, what's the sort of three to five year outlook? How do you guys think about the world for Trinity beyond just sort of the near term in terms of how you want to size these businesses and sort of where you think the opportunities will take you?
Yeah. Over the medium term, I expect this business to really outperform, from a return on equity and an economic profit standpoint. I think the fleet will continue to improve the yield. I think manufacturing's at what should be at the bottom of the cycle. So really when you start getting mid-cycle, this business, especially the Rail Products Group, will generate a lot of cash.
Yep.
So it'll be fun to do something with that cash, whether that's in fleet purchases or whatever that may be. We look at the returns on equity in the business, and I would expect those to We've run 24% the last trailing 12 months and going back a little bit further, and I would expect that will continue.
Got it. Listen, Eric, this was super helpful. Appreciate you spending some time with us this morning.
Thanks, Chris. Appreciate it very much.
Great way to kick off. Thank you.
Thank you, everybody.
Thanks, guys. Appreciate it.