Good day, everyone, and welcome to Trinity Industries Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question-and-answer session. Please note that this call may be recorded. And as a reminder, today's conference call contains forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995, and include statements as to estimates, expectations, intentions and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain of the business issues and risks, A change in which could cause actual results or outcomes to differ materially from those expressed in these forward-looking statements. It is now my pleasure to turn today's conference over to the Vice President, Finance and Treasurer, Gail Peck. Please go ahead.

Thank you, David. Good morning, everyone. Welcome to the Trinity Industries second quarter 2018 results conference call. As we make further preparations for the spin-off of Trinity's infrastructure-related businesses, we have slightly adjusted the format of today's call. Similar to past calls, we will begin with commentary from Theis Rice, Tim Wallace, and Melendy Lovett. Antonio Carrillo, the future President And Chief Executive Officer of the new infrastructure company, Arcosa, Inc., is joining today's call. Antonio officially joined Trinity in late April as Senior Vice President and Group President over the Construction, Energy, Marine and Components Group. Antonio and Scott Beasley, currently Chief Financial Officer for these businesses and future CFO of Arcosa, will provide earnings and guidance commentary for the group, following Melendy's remark. We will conclude with commentary for the rail-related businesses provided by Eric Marchetto, Chief Commercial Officer for TrinityRail; and James Perry, Trinity's Chief Financial Officer. Following prepared remarks, we will move to the Q&A session. Mary Henderson, our Chief Accounting Officer, is also in the room with us today. I will now turn the call over to Theis.

Thank you, Gail; and good morning. In our last call, I reported on the status of the Joshua Harman False Claims Act litigation pertaining to the company's ET-Plus guardrail end terminal system. As noted, the United States Court of Appeals for the Fifth Circuit reversed the Trial Court's judgment and rendered judgment for Trinity as a matter of law. Following the ruling, the Fifth Circuit also denied Mr. Harman's petition for rehearing. Mr. Harman, thereafter, filed an appellate petition with the United States Supreme Court requesting review of the Fifth Circuit's reverse and rendered ruling. Mr. Harman's petition for review to Supreme Court remains pending. The Court recessed in June 2018 and will reconvene in September 2018, after which, the Court could rule on Mr. Harman's petition for review. I have also reported previously on lawsuits regarding the ET-Plus that were filed in the wake of the original jury verdict in the Harman case. While we continue to incur costs associated with our defense in these cases, we are supported in that defense by the Fifth Circuit's unanimous panel opinion, in which the court recognized that the ET-Plus internal system meets all applicable federal safety standards; and the government has never wavered in its approval of the product. For a more detailed disclosure of the False Claims Act case and the company's other litigation, please see Note 18 of the financial statements in Trinity's Form 10-Q for the period ended June 30, 2018, which will be filed today. Additional information on the False Claims Act case and a copy of the Fifth Circuit's opinion can be found at www.etplusfacts.com. I will now turn the call over to Tim.

Thank you, Theis; and good morning, everyone. We're excited about the momentum our company is experiencing both operationally, as we progress towards the expected spin-off of Arcosa. Trinity's second quarter financial results exceeded our expectations as result of strong operational performance. We are experiencing positive momentum in respect to inquiries and orders for a number of our products. During the second quarter, TrinityRail extended its long-term supply agreement with GATX into 2023. The agreement contains orders for the delivery of an additional 4,800 railcars. We have provided railcars to GATX for more than 30 years, and they continue to be a highly valuable customer. I continue to be impressed with the way our businesses adjust to changes in demand. Our employees are highly flexible when confronting the various challenges associated with the complexities of today's business environment. We remain well-positioned to respond as market demand shifts. During the second quarter, Antonio rejoined our management team and is overseeing the businesses that will be spun-off as Arcosa. We're continuing to build a solid foundation for both companies and are making good progress towards achieving our goal of a seamless and efficient spin-off. You will hear more about this from others on today's call. I'm excited about the future of our company and the potential opportunities for long-term growth for both Trinity and Arcosa. We have a highly seasoned group of employees who are extremely capable. I will now turn it over to Melendy.

Thank you, Tim; and good morning, everyone. We've made excellent progress on the expected spin-off of Trinity's infrastructure-related businesses and remain on track to complete the transaction in the fourth quarter of this year. We are grateful to all of our employees, those who are continuing to deliver quality business results to both internal and external stakeholders, as well as those who are working on the spin-off. Our initial Form 10 was filed in May with the SEC. In June, we filed an amended Form 10 that included first quarter 2018 financial information for Arcosa and its expected business segments. We've made significant progress in our financial reporting preparations, and we'll continue with amended filings as needed leading up to the spin-off in the fourth quarter. Our spin-off project leadership teams are continuing their work on all of the key transaction and separation deliverables. Both companies expect to host their own Investor Days, most likely in the fourth quarter, following the declaration date for the distribution of Arcosa shares. Details will be provided to the investment community when plans are finalized. We will continue to update our stakeholders on our quarterly earnings calls and at other times as appropriate. Again, we want to recognize our employees, leadership teams and external advisors for the significant effort and accomplishments through the first half of this year. Their dedication and focus can be seen in the excellent progress achieved to-date, as well as in the positive outlook for both companies. I will now turn the call over to Antonio.

Thank you, Melendy; and good morning, everyone. It's a great pleasure to be joining this call. Having spent 16 years at Trinity before leaving to be CEO of Mexichem six years ago, I am very happy to be back. After a few months of re-engaging with the different businesses, I can tell you that I'm even more excited about the future of the new company and the opportunity to lead my team through this important milestone. You've heard from Tim and Melendy about some of the progress we're making as we move closer to the spin-off. Let me provide some additional color. In May, along with the initial Form 10 filing with the SEC, we announced the name of the new company, Arcosa. We are proud of the historical roots our businesses have within Trinity; and we are equally as excited for Arcosa's future as a successful stand-alone public company. Also, we have made some significant progress in developing the operational model for Arcosa. The model is based on a small corporate office, flat organizations, Lean operations, and decentralized decision-making. Using this model, we have completed the reorganization of our management team and corporate staffing in preparation for the spin. At the same time, we have been working on all the infrastructure support for the new company; securing office space in the Dallas area; establishing the IT infrastructure platform; and making sure that the company will continue to operate smoothly day one after the spin. In addition, I've spent the last three months visiting facilities, talking to employees and meeting with customers and suppliers. During this time, I've been challenging our team to expand their views on strategic approaches to achieve long-term sustainable organic growth, as well as identify attractive inorganic growth opportunities. This time has been extremely valuable to begin developing the growth road map for Arcosa. We do expect to share it during our Investor Day. From market condition standpoint, in general, I'm optimistic. Supportive macroeconomic trends are helping our customers put capital to work. We continue to see strong construction activity in most of the markets where we have a presence. And some of our more cyclical businesses, like Inland Barge are experiencing a much needed lift in order activity from historical low levels. Our businesses are well-positioned to capitalize good macroeconomic trends and increases in infrastructure spending whose long-term fundamentals remain very encouraging. The diverse experience I've gained from my previous roles at Trinity and most recent tenure leading a global growth-oriented organization provide a great foundation to execute a successful launch of Arcosa as a standalone company. We have a fantastic organization built upon a portfolio of market-leading businesses, long-standing customer relationships and a highly talented and dedicated group of employees. I look forward to sharing more about Arcosa's vision and growth opportunities in the near future. I will now turn the call over to Scott.

Thank you, Antonio, and good morning, everyone. Today, I will provide commentary on Trinity's Construction Products, Energy Equipment, and Inland Barge Groups. I will cover our second quarter results and provide updates to our guidance. As a reminder, Arcosa's expected reporting segments for these businesses do not align exactly with Trinity's reporting segments today. And certain businesses that I will discuss, including highway products will remain with Trinity after the spin. For more details on Arcosa's anticipated reporting segments, please refer to the Form 10 filing on Trinity's Investor Relations website. Starting with the Construction Products Group, second quarter revenues increased 19% year-over-year, driven by higher revenues in our construction aggregates, trench shoring, and highway products businesses. Operating profit increased 41% year-over-year. Excluding a $1.7 million insurance recovery, operating profit increased 34% year-over-year, driven by higher profits in our trench shoring business, and lower legal expenses in our highway products business. In construction aggregates, overall market conditions and demand drivers remain favorable, and we continue to seek opportunities to grow this business. As we have mentioned on previous calls, we are experiencing pricing pressure from increased supply in the Dallas-Fort Worth market, but long-term fundamentals in the market remained strong. The trench shoring acquisition that we made in the third quarter of 2017 continued to contribute to the positive year-over-year performance of the group. The management team in Michigan has done an excellent job integrating the business, and we're excited about the financial performance and the strategic fit of the combined trench shoring businesses. Overall, long-term demand fundamentals across our Construction Products Group remained strong. We believe that our platform of businesses is well-positioned to benefit from economic growth in our key markets and long-term infrastructure spending. Turning to guidance. We adjusted our revenue guidance up modestly to $550 million…

Thank you, Scott; and good morning. TrinityRail's performance exceeded our internal expectations for the second quarter, as a result of additional lease assignments, more railcar deliveries, and improved operational efficiencies, and overall cost control measures. Our culture of flexibility and collaboration positions us well to respond to the momentum we see building in the current railcar market. North American rail traffic volumes during the second quarter continued to improve with the year-to-date growth of more than 3.5% compared to 2017. Available equipment tightened leading to an increase in orders for new railcars. The industry received orders for approximately 23,800 railcars during the second quarter, the highest level in nearly four years. Commercial inquiries for railcars are continuing at elevated levels, reflecting improved industry fundamentals. In addition, railcar scrapping rates have kept pace with industry new railcar builds. This supply and demand dynamics have resulted in some improvement in pricing fundamentals for new and existing railcars. While railcar fundamentals are improving, various geopolitical events are creating a dynamic environment that we are watching carefully. At this point, recent impacts from steel tariffs on our supply chain have not materially impacted our margins. Also, railcars serving markets potentially impacted by trade tariffs, namely agricultural and consumer goods, are being partially buffered by increases in global demand. We are monitoring these situations very closely and are ready to respond should the market shift. During the second quarter, leased railcar utilization improved to 97.1% from 96.1% in the previous quarter, reflecting a higher level of lease assignments of existing railcars. Our total owned and managed fleet included approximately 121,000 railcars at the end of the second quarter, representing 13.6% year-over-year growth and demonstrating our commercial services teams' ability to originate railcar leases. As our lease fleet grows, more of our commercial efforts are focused…

Thank you, Eric; and good morning, everyone. We're very pleased with our second quarter operating results and the positive momentum in many of our businesses. We recognize the year-over-year comparison for consolidated results is complicated by several items, most notably, tax reform, the call of the convertible notes, and our planned spin-off transaction. I will provide some details today that should assist in the comparison. In yesterday's earnings release, we announced revenues of $942 million, up 4% year-over-year and earnings per share of $0.43, including spin-off transaction costs of $0.05 per share. This compares to EPS of $0.33 in last year's second quarter, which did not include any transaction cost. This resulted in adjusted second quarter EPS of $0.48 for core earnings for the second quarter this year, a 45% increase year-over-year. Our results benefited from U.S. tax reform and a higher than normal rate in last year's second quarter, adding EPS of $0.10 on a year-over-year basis. We expect a 25% tax rate in 2018 compared to 36% last year, excluding the onetime benefit from adoption of tax reform. In April, we provided a notice to call our $449 million of convertible notes at par on June 1, which forced conversion by the holders. We settled the entire amount of the notes par plus the in-the-money premium in cash for $647 million, the bulk of which settled in the second quarter. We funded the redemption with a combination of cash on hand and proceeds from a non-recourse railcar-backed securitization completed in June issued on favorable terms and conditions due to strong investor interest. As a result, we eliminated the dilutive impact of the convertible notes beginning in the second quarter which was incorporated into the guidance we've provided in April. While not a direct usage of our authorized share…

And we will take our first question from Allison Poliniak with Wells Fargo. Please go ahead. Your line is open.

Thanks. Hi, guys. Good morning.

Good morning.

So, James, I just want to go back to your comments on the railcar manufacturing expectation for margin this year. You talked about some changeovers, and obviously, the pricing issue seems to have been ongoing this year. Could you help us quantify like what are you hedging in terms of the line changeovers or what impact do you expect that to have for that substantial drop in the back half? Any color you can give there?

Sure, Allison. Thanks. This is James. We mentioned a couple of things at a high level. If you kind of take those apart, we do have some production line changeovers as our mix shifts. Mix alone will shift some of the pricing and margins available. And what we did in the first half versus the back half is still a good mix, but it does change. As a result of some of the changeovers, you have some headwinds on expenses in the back half of the year. We don't quantify that, but that's clearly a part of that slight margin degradation. The other thing I mentioned was pricing when we took the orders. When you look at the first half of the year, we were still delivering orders that you took as far back as 2014 and 2015, when pricing was pretty strong in some of the mix of the cars we delivered. Those are, for the most part, fading away in the second half. And more of the orders that we took – that we're delivering in the back half of the year were taken in 2016 into 2017, and even early in 2018, when the pricings have been softer. So, while we feel good about the overall margin of 9% for the year, we see a little bit of softening in the back half when you add all those pieces up.

Great. That's helpful. And then I just want to go back to the Energy Equipment, the margins. You talked about margin being down, but you were talking about the other businesses in Energy Equipment driving that margin down. But you also mentioned utility structures having issues in Q2. Could you help us bridge, and then what's going on in the other businesses of Energy Equipment that would bring that number down for us? Could you help there?

Sure. Sure. This is Scott. Allison, I'll answer that question. So, on the utility structures front, we talked about – that was primarily related to a new product type that we've began producing in the quarter. We expect the impact of that to be relatively contained in the quarter and produce all of those products by the middle of August. So, hopefully, that doesn't spill too long into the rest of the year. On the other Energy Equipment product lines, that's really a mix of factors across storage tanks, cryogenic equipment, oil and gas processing. In storage tanks, we've had a bit of a lag effect in passing along steel price increases to customers. It's a smaller impact but had an impact nonetheless. On cryogenic and oil and gas processing equipment, those inquiry levels have increased, but it's still a very competitive market with a lot of capacity, so pricing pressure there. And then, we've had some project delays related to customers in Mexico that's in the other equipment product line.

Great. Thanks, guys.

We'll take our next question from Matt Elkott with Cowen. Please go ahead. Your line is open. Matt Elkott - Cowen & Co. LLC: Good morning. Thank you for taking my question. I wanted to ask you guys if you can tell us what percentage of your 10,000-plus cars that you expect to deliver in the second half already are in the backlog versus what you may have modeled to get in orders for same-year delivery?

Yeah. Matt, this is James. If you look at the overall year, the 21,000, and you'll see a little more detail in the 10-Q on what's in our backlog for delivering 2018, you get to a number of that 91% for the full year. So, you don't have a whole lot left of that 10,200 to fill in the back part of the year. And of course, that was at the end of June. And Eric's team is working every day, as we've started the new quarter to fill that back half. Matt Elkott - Cowen & Co. LLC: Got it. That's good color. I also wanted to touch back on the margin thing from earlier on the Rail margin. Given your backlog has increased, and it has some higher ASP and probably higher margin equipment in it as of late, and given the rail traffic and the environment is looking very strong and trending in the right direction, it wouldn't be farfetched to assume that there is plenty of upside to the Rail margin when we look past this year? Is that correct?

Yeah, Matt. This is James. And I'll pass it to Eric as well. I think we're certainly optimistic, and we've seen some increase in pricing in certain areas. One thing we'll mention when you look at ASP especially this quarter, when we bring in the GATX over, which both Tim and Eric mentioned. We're very pleased to get that extension. Of course, that's a little ways out. That picks up in a couple of years and extends out to 2023. The car type defined by that is tank cars, and you're going to have a higher ASP, so that alone kind of moves that number. I can't comment on the margins, of course, from that perspective, but that accounts for some to have movement (00:34:58). I'll let Eric address kind of the overall market and what we're seeing on pricing.

Sure. Matt, this is Eric. As I mentioned, we've seen rail traffic increase at quite a healthy level, and that has certainly helped with the supply and demand dynamics, and it's helped pricing. And so far, we think that's helped on both existing and new cars, and we expect that to continue as long as it kind of keeps growing the way it is. Matt Elkott - Cowen & Co. LLC: Okay. And I may have asked you this, guys, before at another earnings call previously, but just trying to gauge how much more manufacturing capacity you have. I know it's a nuance question because it depends on the type of railcar you might get, but trying to get a sense of how much more you can build without having to substantially increase operating resources or reactivate lines that may be idle?

Yeah. Matt, this is James. To your point, it's a bit of a moving target. It does depend on car types and those kind of things. We've got footprint to build more cars than we have now. We clearly built a lot more railcars a couple of years ago. Some of those facilities have shift into other product lines, but rail still has good capacity across the platform. Sometimes it's not just the floor space, but it's adding labor, adding shifts, those kind of things. So, we continue to have ability to grow our capacity as the market demand improves. For us, it's a matter of kind of where we have those lines set up and making sure we have the orders in the backlog to increase the labor side and making those investments. If we get to a point where there's other investments we need to make, we're certainly prepared and have a balance sheet to support that. But we're comfortable right now being able to absorb the type of growth that are Eric's talked about. Matt Elkott - Cowen & Co. LLC: Great. Thank you very much.

We'll take our next question from Mike Baudendistel with Stifel. Please go ahead. Your line is open. Michael James Baudendistel - Stifel, Nicolaus & Co., Inc.: Thank you. You mentioned – I think you said that you wanted to grow the lease fleet, that's a priority that you have. Is that taking ownership – you're going to grow the number of railcars that you own, or is it just managing the cars? I thought on previous calls you're talking more about maintaining that level of ownership and just managing more cars?

This is Tim. That's over both of those two areas. Our plan is to expand and grow our Railcar Leasing business as we look for other opportunities within that railcar transportation value stream, and we see a lot of opportunities out there to expand and grow our Leasing business. And we like the owned portion of it, and we like the management portion of it. Michael James Baudendistel - Stifel, Nicolaus & Co., Inc.: Got it. And I also wanted to ask you on the Leasing, you mentioned in the press release that you had lower average lease rates than the prior year, which is not a surprise. I just wanted to see do you have an expectation of when that may no longer be the case where they could be flat or up year-over-year?

As we mentioned, yes, the lease rates are not to the level that they were in the previous peak. And while we are seeing increases in lease rates, they're not to the levels that they were at the previous peak. Michael James Baudendistel - Stifel, Nicolaus & Co., Inc.: Okay. So, is it still going to be, I think, period time where the average lease rates in the upcoming quarter is going to be below what it was the prior year? Is there a period of time where you think that's going to continue to be the case?

Our guidance this year reflects that, that lease rates will be below expiring lease rates. Yes, that's correct. Michael James Baudendistel - Stifel, Nicolaus & Co., Inc.: Okay. Got it. And then, you mentioned that scrap rates have kept pace with new car build. Do you have any sense of whether those cars are being scrapped, or you had any sort of outlook for being used again, or was it just really those have been idled for long period of time, and they're just now being scrapped with the higher commodity prices?

I don't have color on what the driver of it is, but we are seeing that the cars are leaving the fleet. When I talk about cars being scrapped, that they are leaving the fleet, so they're not getting repurposed or anything like that. This is Eric, by the way. Michael James Baudendistel - Stifel, Nicolaus & Co., Inc.: Okay. Got it. I'll turn it over. Thank you.

Thanks, Mike.

And we'll take our next question from Matt Brooklier with Buckingham Research. Please go ahead. Your line is open.

Yeah. Thanks, and good morning. So, just with respect going back to the Rail Group, you talked to some line changeovers happening in the second half of this year and the potential impact on margins. Are that the changeovers weighted more towards third quarter or fourth quarter? Are they kind of spread out evenly? I just want to make sure we're not missing anything in terms of the timing of the line changeovers.

Yeah. Matt, it's James. It's just hard to get that specific. We give annual guidance, and we've kind of given where the back half is. And there are certainly some changeovers as we go throughout the back half, but we're not going to be much more precise than that right now.

Okay. And then, the commentary has been demand, it's picked up sequentially in 2Q. And you guys have talked that new railcar pricing has also potentially picked up. We also know at the same time that your input costs are rising with the steel tariffs. So, I'm just trying to get a sense for how much net pricing do you think you're garnering here, i.e., I guess, the sequential increase. If you want to state magnitude, I'd love that number. But the sequential increase in terms of new railcar pricing, how much of that is related to tighter supply and incremental demand? And maybe how much of that is just a function of passing through incremental input costs?

Yeah, matt. This is James. Hard to break it down specifically. It certainly varies car to car in terms of magnitude. I think, we would attribute more of it to the input costs. There are certainly some car types and orders that are seeing a lift in pricing due to demand. And that's there. It's still somewhat moderate, but we're seeing some improvement. We have had success in being able to continue to pass through the cost in the pricing. So, while that leads to a little bit of margin compression just in the math, we've been able to protect our profit dollars and our ability to sell those cars at the prices we need to cover those costs. So, that pendulum may shift in the coming months or quarters, and we'll continue to update folks on that, it's a good question. But we've attributed more of it now in that respect.

Helpful. And just the last one, and I jumped on the call a little bit late, so apologies if this is redundant, but the orders that you received on the barge side, trying to get a sense for the potential sustainability of orders. It sounds like demand has picked up. Was there anything chunky about the order at barge in the second quarter? If it was – you had a large customer come in and order some equipment? I'm just trying to get a feel for like sustainability of maybe barge orders directionally better on a go-forward basis versus the prior 12 months?

This is Scott. I'll take that question. I think the natures of barge orders are that they are pretty lumpy quarter to quarter. So, I wouldn't read too much into sequential order numbers. The good news is that the orders in the second quarter were for a number of different customers across a wide variety of commodity types, like I said, on the liquid side but still pretty broad-based demand. Inquiry levels for this quarter have been mixed so far. So, like I said in my prepared remarks, there's still a mix of positive factors, and then plus some headwinds that are causing customers pause, particularly oversupply on hopper barges, and uncertainty related to long-term contract rates and steel prices. So, I think, like I said, we'll give you more information as we go throughout the year, but it's too early to call a sustained recovery.

Great. Appreciate the time.

Thanks, Matt.

We'll take our next question from Gordon Johnson with The Vertical Group. Please go ahead. Your line is open.

Hey, guys. Thanks for taking the question. I guess, first, just looking at the cash balance. I noticed this quarter there was a significant drop in marketable securities, and your cash per share has fallen. Can you guys discuss what happened there?

Well, Gordon, this is James. The marketable securities and cash lines are rather interchangeable. It's a matter of the length of the investments that we make. Clearly, I've mentioned a couple of things. We did redeem the convertible notes this quarter. And while we issued a rail financing to cover that in some degree, you had a dip of about $170 million or so, the difference in the two. So, that was one of the primary uses of cash. We had no other borrowings in the quarter, but we continue to add to our lease fleet. We continue to make investments in the company. When you look at our car sales that we forecasted $350 million, you had more of that in the first half – or you had very little in the first half, $86 million more that's going to be in the back half. That obviously is a lift to cash. And as we prepare and we look at our capital structures with the spin-off with Arcosa, we're positioning the company to be able to be very flexible with our capital as we get closer. And we look at certain capital expenditure opportunities. And as we said that both companies are shifting there between those two lines keep us flexible, but it's really the investments we've made in the company and that cash coming down as we invest in the company's future.

Okay. Thanks. That's helpful. And then just looking into the Leasing segment, the margin guidance, it looks like for the year is just under 41%. So, it looks like there could be some pressure there. Did I hear you guys right in saying that the cars you expect to ship this year – of those cars you expect to ship, roughly 45% are going to be sold to your Leasing Group?

Yes. That is what we said. And then, in terms of the margin, as Eric mentioned, the biggest thing is pricing coming down. And when pricing comes down the cost don't really change. We certainly worked to be more efficient, but your depreciation, your overhead, those type things don't change. So, as pricing comes down, that moves all the way down the margins. So, as we continue to see those expiring leases come off, Gordon, you see a little bit of margin pressure on that. But we're still pleased with the performance of that group and their ability to renew, assign, and originate leases.

Okay. And then just one last one for me. So, as we look to that 45% number ,it seems like there may be – some guys out there are concerned about the number of railcars being produced right now. And given this year has been strong economically, is there any concern that should the economic cycle shift, and there's these, I guess, some 45% of cars being shipped to the leasing fleet, that we could see some actual more additional pressure in margins next year versus a lift? Thank you for the questions.

Sure, Gordon. It's James again. In terms of that, keep in mind that when we ship cars to our leasing company, we've got leases in place. We don't ship cars on spec to the leasing company. So, obviously, when we sell cars to third parties, they've got a reason to need that car. And when we send a car to our leasing fleet we have a lease already signed up. So, that car is needed by someone when we sign the lease, of course. We make investments in our fleet looking at our internal returns that we want to achieve. And obviously, that comes into what type of lease we're able to sign. So, there's certainly external pressures, but I think we're seeing, as Eric mentioned, lift in the overall economic conditions. Railcar loadings are up, the storage numbers are coming down and that leads to demand. And that's what our results and our expectations tend to reflect.

Thanks again.

We'll take our next question from Justin Long with Stephens. Please go ahead. Your line is open.

Thanks, and good morning. I wanted to start by following up on visibility in the Rail Group backlog. You mentioned the level of visibility you have in 2018. But would you be willing to share the amount of builds you currently have locked in for 2019? It's a little bit tougher to gauge with some of the multi-year orders in the backlog. And then also, secondly, based on the visibility you have at this point and everything you've said with the different puts and takes on Rail Group margins, what's your level of confidence that the second half of this year will be the bottom for Rail Group margins?

Yeah, Justin. Thanks. This is James. In terms of visibility for the backlog, it's a little too early to give much insight into what the 2019 level looks like. We've told you what we have left for this year. And then, obviously, you have a sense of what GATX has ordered 2019 and going forward with a couple of contracts that we have in place with them, including the recent extensions. So, you can kind of back that out and get a little bit of a sense. But there's some obviously that spreads out beyond 2019. The orders that our commercial group is taking now, there's a lot of 2019 ordering going on, some extends beyond that, but that's probably the sweet spot right now is for 2019. There's not much left in 2018. So, we'd focus there, but I think it'll be later in these calls that we really start giving some insight into what 2019 looks like. In terms of where do we see margins, we certainly are seeing, as we mentioned, some increase in demand, some lift in pricing, as we can increase our volumes, if we're able to do that. And the third-party industry estimates would point to slight increases in volumes the next couple of years. We'll see if that holds. As we increase volumes and as pricing comes up, then that gives us a lift on margin. But I don't think we're yet prepared to point to when we have a trough or what 2019 looks like yet. It's a little too early. We have a sense of where pricing is, but a little too early to really let that flow through yet.

Fair enough. And secondly, I wanted to ask about how the secondary market and demand for railcars has trended in the past quarter? And on railcar sales, I know it's a hard thing to forecast, but do you have an opinion on the long-term run rate you'd expect for railcar sales? I'm curious if $350 million that you guided for this year is a good proxy for the longer term.

Yeah, Justin. It's James. I'll take the second part, and I'll let Eric touch on the secondary markets. In terms of our long-term sales, yeah, it is a little too early to talk about what our plans are. However, the institutional partners in the RIV platform we work with continue to have demand in the long term. We have very vibrant and dynamic dialogue with them. And there is that demand there, and that's clearly, as Tim mentioned, our desire to continue to grow our own fleet and grow the managed fleet. It makes that an important tenet of our strategy. So, we continue to feed both sides of that. As we talk about our growth plans as a new Trinity after the spin-off, we'll give some more insight into what those types of things look like. But it will continue to be an important part of our strategy in terms of our portfolio, how we use our capital, and then how we also take the investor appetite from the institutional side with our partners and work with them. Eric, do you want to talk about what the secondary market looks like?

Sure. Justin. This is Eric. James mentioned the RIV market and the institutional investors. But on the secondary market, we are still seeing very healthy levels of activity. The pricing is still – it's certainly a sellers' market in terms of where pricing is going on railcar prices for secondary market. We really haven't seen that change over the last several quarters.

Okay. I'll leave it at that. Thanks for the time.

Thanks, Justin.

We'll take our next question from Bascome Majors with Susquehanna. Please go ahead. Your line is open.

Yeah. Thank you. So, in rail manufacturing, can you give us the one or two primary reasons you were able to do 2 points better in the first half of the year on margin than you'd originally guided?

Yeah. Bascome, I think, I would attribute it, for the most part, to some operating efficiencies. The team did a good job. Clearly, we had a decent sense of what the pricing looked like. Even internally, our volume was a little higher than we had looked at in the quarter. Some things just shifted a little from Q3 to Q2 on the margin, and that alone can make a difference. And so, we had some well-priced orders in the quarter. And to your point, when we were in late April, we had a sense of what that production volume looked like, but things could move around a little bit. And I think it's the efficiencies. The team on the manufacturing floor performed very well, in looking at cost, and looking at their efficiencies. And I think that'd be the one reason that we would really point to as a success there. And while we certainly anticipate that to continue and for our folks to continue to outperform expectations, the back-half guidance is more related to where we see the pricing than anything else.

Understood, and I appreciate that color. I want edto spend a little bit of time on the asset-backed securitization you did about a month ago. I think the numbers are 7,000 railcars. You valued them at $620 million. You borrowed about 77% loan to value on that deal. Can you walk us through, for those of us who aren't really familiar with how these work and are put together? How did the parties come up with the $620 million valuation on the 7,000 cars?

Sure, Bascome. It's James again. And as you know, we've kind of been in this market and really, to a big degree, pioneered the rail ABS market. And we're proud of the team that we have in place that's been with us throughout and will continue with us. Really, as we look at putting these transactions together, we sold for a few things. We sold for what is the value of those railcars, to your point, from an appraisal standpoint, the package that we put together. We then do a lot of stress testing with the rating agencies, because these are rated transactions on what the cash flows look like, what the advance rate is. You mentioned, 77% to 78% we'll bear. And you really sold for the type of coupon you're looking for with the term. And it's about a eight-year average life on the two tranches of the $480 million, and then what that backs into in terms of an advance rate And there's some calculus in there. You're solving for all those pieces. And we think we've got an optimal structure that we put together with an investor base that was very pleased with the package that we put together. And we're very pleased with the execution from the team.

And I know it seems like a good deal for you guys for sure. Just to clarify one point, you said something about an appraisal. Is this a third-party appraisal supported valuation?

Yes. Yes. The credit agencies look at that, as well as the investors. So, that's – certainly we have a value. We look at things internally, but this is all supported by a third-party appraisal.

And how would that compare to the book value of these assets?

We're not going to dive into that too much. Generally speaking, it compares pretty well, but it varies the portfolio to portfolio. But we're pleased with where the appraisal came out. And we always feel, of course, that our book value is appropriate.

And Bascome, this is Eric. It's a combination of a metal appraisal and an income appraisal. So, it's not just a metal appraisal; there's an income appraisal. It's not necessary what the value would be in the secondary market.

That's a great point. Yeah, the book value clearly doesn't take in to account the income appraisal. That's just a depreciated value, so it's a combination, to Eric's point.

Well, I appreciate it. Congratulations on the deal. And I'll pass on to the next person.

Thanks, Bascome.

We'll take our next question from Steve Barger with KeyBanc. Please go ahead. Your line is open.

Thanks. We've got some market share questions on rail this quarter. What kept you from taking more orders? Was that a strategic decision around planning for more efficient manufacturing, or were you wanting to maintain some quoting discipline in anticipation of better pricing?

Eric, why don't you take that?

Sure. Steve, this is Eric. We don't manage our business off the market share. We're looking at what production lines we have, where the opportunities are. We were not surprised by the level of order activity in the industry. That is what we expected. So, we were very conscious of where our orders were coming in throughout the quarter. And it's a function of where our backlog runs, where we have open production slots, and what the market's looking for versus what we're going to build. We're very comfortable with where we did in the second quarter.

Do you anticipate – I mean, you've already referred to this, but do you think that pricing is getting better, given supply and demand dynamics in the industry right now?

Yes, we do.

And that's true across multiple segments, right?

It is. But certainly, some segments have a little more pricing power than others. But as the industry backlog extends, that has a favorable impact on pricing on most car types. And then, the available cars have continued to tighten some segments more so than others. But certainly, generally speaking across the board, we've seen a modest lift in pricing. And in some markets, we've seen more of a lift in pricing.

And Steve, this is James. I'll take on. I think Eric alluded to it. But as you know, the orders can be lumpy from who gets the orders. And even in our quarters, as Eric mentioned earlier, the inquiry levels remain very good for us, even into this quarter. And I think backlog is a good indicator of kind of where our share is, and how we're positioned over the longer term. But we're pleased with the orders we got. And to your point, we do always take a look, when we take orders at positioning, for the production lines, as Eric mentioned, as well as the pricing, the returns, those types of things. And I think, the team's doing a good job.

Yeah. I mean, I guess, to that point, you did increase guidance by 20% at the midpoint. And it's gone up more than that through the year. Strong orders; pricing is getting better; we're hearing very positive commentary from competitors and related companies. Just seemed like you were a little reluctant to talk more positively on 2019. Is there anything holding you back from that?

I don't think anything's holding back. It's July. We certainly have some visibility into 2019, but it's early. Usually it's later in the year, before we start talking too much. We certainly have good orders going into 2019 in the rail space. We always have good visibility with our leasing company, what that looks like. But especially in light of the spin-off , as we get closer to the spin-off, have our Investor Days. I think you'll hear us talk more about what the future holds, and then when appropriate, to talk more concretely about 2019, both teams will be able to do that.

Okay. Thanks.

Thanks, Steve.

We'll take our next question from Kristine Kubacki with Mizuho Securities. Please go ahead. Your line is open.

Good morning. I just wanted to ask a question about the retrofits you mentioned. Just that there's been some discussion about the Western Railroad talking about that they're no longer going to allow those retrofits into service. And I was wondering, one, I think you mentioned and I just want you to clarify that talking about moving those into other types of service, is that part of the genesis for the retrofit? And then, two, are you hearing anything from your customer base or seeing anything in your order activity that suggesting that those – not allowing those retrofits is driving incremental demand at this point?

Eric?

Sure, Kristine. This is Eric. There is absolutely some discussion going on around modifications, and specifically, cars for crude service. Those discussions where the Class I railroads have created uncertainty; uncertainty in terms of which car types will go in those services. Up to date, nothing has been announced, and so it's a lot of rumor. In the terms of the crude-by-rail market, what we've seen thus far is most of demand for crude-by-rail tank cars has been filled with existing railcars. As if those things change, that would certainly shift to newer tank cars, rather than the existing tank cars. But the discussion so far has only been on crude, not on other flammable products. And the other flammable products make up of a good portion of the tank car movements in flammable service.

And Kristine, this is James. When we give our guidance for the investments, we're clearly talking to our customers about the needs they have. We're talking to our portfolio team about where they see needs for, not just crude, but as Eric mentioned, many other flammable commodities. And we think these investments we're making will really position these cars well, and us well, to absorb that type of demand and give us maximum flexibility with these cars. So, we're cognizant of the things you mentioned, as we're starting to hear some of that. But this really maximizes our availability and gives us the highest return potential on those cars.

Perfect. Thank you very much. Appreciate it.

Thanks.

We'll take our next question from Willard Milby with Seaport Global. Please go ahead, your line is open.

Hey. Good afternoon, everybody. Actually if I could follow up on that retrofit. Sorry if I missed it. But did you mention the size of the pool of cars that were covered under this $85 million investment?

No, we did not. This is James, Will. It varies on the type of modification you have to make, to a few thousand dollars, to a few tens of thousands of dollars. So, we've not talked about how many cars that incorporates.

Okay. If I could follow up on lease fleet sales. I think last quarter, you mentioned that you're expecting heavier Q2 and Q4. Is that still the case?

We certainly did $85 million in Q2. We didn't do much in Q1, so we highlighted that. We're still looking at timing between Q3 and Q4. So, I think we're really just looking at the back half to fill that $350 million of guidance we provided.

Okay. Fair enough. And one question might come out of left field, just because I don't think it's ever been talked about on a conference call before. But the rationale behind putting Trinity Logistics with the Rail Group, as opposed to maybe Arcosa, because in my understanding, I believe, isn't most of that business sided on the Energy business, the Logistics Group?

Yeah, Will. This is James. There's a couple of businesses, to your point, that we could've put in either side. The Logistics Group, while we do obviously some external deliveries, there's a lot of internal deliveries for our Rail Group, bringing some of the rail parts between plants to our rail shops for fabrication, those types of things. So, it's a business they can provide services for external companies. Arcosa may be one of those. But we had to decide. It was going to go one way or the other. And we felt it was most efficient given who that business serves to keep it at the new Trinity.

Okay. So, it is heavier on Rail than any other group?

Marginally, yeah. There are some that it does for both, but we felt it made more sense in Rail.

Okay. Fair enough. I appreciate the time. Thanks.

Thank you, Will.

And there are no further questions on the line at this time. And we'll turn the call to Gail Peck.

Thank you, David. That concludes today's conference call. A replay of today's call will be available after 1:00 Eastern Standard Time through midnight on August 2. The access number is 402-220-2672. The replay will also be available on our website located at www.trin.net. We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.

And this does conclude today's program. Thank you for your participation, and you may disconnect at any time.