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 the actual results or outcomes to differ materially from those expressed in the forward-looking statements. Good day and welcome to the Third Quarter Results Conference Call. [Operator Instructions] Please be advised, today’s program may be recorded. It is now my pleasure to turn the program over to Jessica Greiner. You may begin.

Thank you, Aaron. Good morning, everyone, and thank you for joining us today. I’m Jessica Greiner, Vice President of Investor Relations and Communications. We welcome you to Trinity Industries’ third quarter 2019 financial results conference call. We will begin our earnings conference call with our prepared remarks from Tim Wallace, Chief Executive Officer and President; followed by Eric Marchetto, Senior Vice President and Group President of TrinityRail. Melendy Lovett, Senior Vice President and Chief Financial Officer, will provide the financial highlights and outlook. Following the prepared remarks from the leadership team, we will move to the Q&A session. Brian Madison, President of Trinity Leasing and Management Services; and Paul Mauer, President of TrinityRail Products, are also in the room with us today and will be a part of the Q&A session. Sarah Teachout, Senior Vice President and Chief Legal Officer; and Steve McDowell, Vice President and Chief Accounting Officer, are also in the room with us today. It’s now my pleasure to turn the call over to Tim.

Thank you, Jessica, and good morning, everyone. Trinity’s third quarter financial results significantly improved year-over-year due to the growth of our railcar lease fleet and increased deliveries of new railcar. The 34% increase in revenues and doubling of our earnings per share reflects TrinityRail’s ability to grow and improve its financial results. Demand continued at lower levels during the third quarter due to several economic factors. Our management team is responding accordingly and is being highly selective when originating new railcar leases. In addition, our third quarter delivery schedule was impacted by various challenges. As a result, our team worked through – worked with our customers to shift a portion of our new railcar production of this year into the first half of next year. This helps smooth out the transition to a lower level of railcar production for the next year. Eric will provide specifics on this topic during his remarks. Trinity is positioned to successfully navigate through the shifts in market demand. We are highly experienced at responding to both short- and long-term cycles. The recurring revenues associated with long-term leases in our Railcar Leasing business provide the company with a predictable steady cash flow – with a predictable level of steady cash flow. In addition, our management team has been successful in lowering Trinity’s cost of capital and streamlining our operating structure. We’re making great progress in optimizing our balance sheet. We just completed another successful financing of the portfolio of Railcar. Melendy will provide information about this during her comments. I’m optimistic about the opportunities that lie ahead for our company. During my 44 years with Trinity, we have successfully navigated through a wide variety of situations, transformed our company multiple times and significantly expanded our competencies. Our railcar lease fleet is now one of the…

Thank you, Tim, and good morning, everyone. TrinityRail had strong year-over-year financial performance during the third quarter. Throughout much of 2019, demand for railcars in North America has remained at or above replacement levels. However, continued declines in rail traffic volumes, ongoing trade disputes and slowing industrial production are creating unfavorable conditions in the rail equipment market. In the near term, we believe these headwinds will be a drag on demand for new railcars and drive existing railcars into storage. With that said, a few railcar markets are likely to see strong interest despite the broader market trend. Investments in North American petrochemical capacity, new opportunities to shift fuels from Canada and the U.S. to Mexico and ongoing attrition are likely to drive demand for new and existing railcars in portions of the North American fleet. We are being very deliberate as to the business we pursue as we adjust our platform for a softer railcar demand environment. TrinityRail’s third quarter financial results reflect continued growth of our portfolio of leased railcars and higher manufacturing railcar deliveries with a favorable product mix year-over-year. Railcar utilization slipped sequentially primarily due to two customers’ filings of Chapter 11 during the quarter, one of which was a result of a major fire that shuttered the operations of the company. I’m pleased with our ability to renew and assign leased railcars in our portfolio, given the competitive market environment while differentiating TrinityRail’s platform of products and services. We expect our lease portfolio to experience a slight increase in average lease rates year-over-year in 2019. Our team has done a good job managing the diversification and renewal risk exposure of our railcar lease fleet. As we look ahead to 2020, less than 15% of our portfolio is up for renewal. Based on current market pricing,…

Thank you, Eric, and good morning, everyone. Before I begin my prepared remarks on our financial priorities and outlook, I’ll quickly review the third quarter 2019 performance highlights announced in our press release yesterday. The company reported significant growth in year-over-year revenue, operating profit and earnings per share, primarily due to higher overall railcar manufacturing deliveries with a favorable product mix as well as growth in our railcar lease fleet and sales of leased railcars from our portfolio. Third quarter railcar deliveries were lower than our expectation due to the challenges Eric mentioned as well as weakening market demand going into 2020. Our team has responded and replanned our production schedules for the remainder of the year and the first half of 2020. A reduction in corporate-related expenses also contributed to our financial performance during the quarter. Year-to-date, corporate expense is down $37 million or 32% due to lower litigation-related spend and cost optimization efforts. As of the end of the third quarter, the company has generated operating and free cash flow before lease fleet investments of $164 million and $215 million year-to-date, respectively. We believe free cash flow generation before lease fleet investment will be approximately $240 million for 2019 or around 10% of our market cap as of yesterday’s close. Our third quarter performance is indicative of Trinity’s ability to leverage our integrated platform and scale our operations to meet customer demand while generating strong results for shareholders. We are making good progress on our key financial priorities for 2019 including lowering our cost of capital, deploying capital to return of accretive investments and returning meaningful and steady amounts of capital to shareholders. Subsequent to quarter-end, Trinity issued $387 million of A rated notes under an existing railcar asset-backed securitization. This issuance yielded a blended interest rate of…

Certainly. [Operator Instructions] And we will take our first question from Bascome Majors with Susquehanna.

Yes. Thanks for taking my questions here. Tim, congrats on the looming retirement. I was hoping that you could share the Board’s perspective on both the timeline for the next CEO hire at Trinity and maybe the skill-sets that you’re really focused on when you’re trying to find who is going to lead effectively, what’s been a lifetime family business for you into the next generation? Thank you.

Okay. Thank you, I appreciate your comments and here is my response to your question. As I’ve said, the Board initiated a search process for a CEO and we’re considering both internal and external candidates and our Board is responding by establishing this as a very high priority. This is an independent selection process. I’m participating in the process at the request of the Chairman from time to time. I’d say the selection process is going really well and we will comment publicly when there is announcement to be made about this. Overall, I’m very pleased with the situation. The search really gives us an opportunity to refresh the CEO role and I’m highly supportive of the entire process. We have a wide variety of competencies that we’re looking for in a new CEO and we’ll talk more about it as we identify the candidates and introduce the person to the public.

Fair enough. And once that’s completed, is your intent to remain on the Board or is that something where you would eventually step down as someone takes over?

Yes. My intent is that as soon as the CEO takes the position as CEO, I will no longer be on the Board and I will assume the position as an advisory role and assist when I can, but it’s important to me that the person that becomes CEO of the company has the full attitude of being able to lead and direct and manage the company, so I do not plan to be actively involved. I had a lot of fulfillment watching Arcosa as a public company and seeing the team there pull together and create value for the shareholders and I ultimately will have that same position as a shareholder of Trinity watching the company fulfill its vision. So I have a very active personal life plan and so I’m not going to be actively involved in the company on a long-term basis.

Tim, thank you for that detailed and thoughtful perspective and we wish you the best and now we’ll look forward to the next best update from you guys and the Board. Thank you.

Thank you.

And we will take our next question from Matt Elkott with Cowen. Your line is open.

Good morning. Thank you, Tim, congratulations on the upcoming retirement. If I look at the last five years, you guys have averaged about 37% of industry orders. This year-to-date, you have about 27%. So when I look at this and see that you’re also expecting write-downs on underutilized manufacturing assets, is this a strategy to reduce your manufacturing footprint as you focus more on growing the lease fleet and transition into more of a lessor?

Eric, you want to take that?

Sure. Matt, I’ll take that. So I would – no, I don’t – I do not think our strategy is to reduce our manufacturing footprint, but the reality is we have 125,000 railcar lease fleet and so all of our opportunities that – our commercial opportunities, our inquiries have to go through that 125,000 railcar fleet before we build another railcar. So I think the result is you get a more efficient platform as a builder with a large lease fleet that we’re going to act more like a asset owner. The – when it comes to, specifically, the write-downs, those are older, non-operating manufacturing assets. We did not operate them in this last railcar cycle. As we went through it, we’ve expanded our production footprint elsewhere with our existing facilities and so we really didn’t see a need for those facilities in the future.

This is Tim. Also, some of the facilities we talked about are legacy facilities. But we kept – we intentionally kept some facilities and let Arcosa go ahead and have a clean start, and we took responsibility for some of the older facilities that have been idled in Trinity for a number of years.

Good insights. Thank you very much. Just one more question on the lease fleet. In the current tough environment for freights, overall, and also given the small cube covered hopper fleet that you have within the lease fleet, how much more pressure should we see on utilization as we exit 2019 and into 2020?

We have – certainly, we have a good line of sight on our expirations, both the remaining of this year and into next year. And I think I mentioned that as we look at our expirations next year and the lease rates, where those current lease rates are on these car types, we see about a 2% headwind, which is very modest. We do not expect to see significant changes in our utilization. We’re working to keep our fleet fully employed. And where we’re at, we’re very comfortable with our renewal expirations. It’s not – we work very hard to smooth out any exposures to certain markets and so we’re very comfortable – as we go into 2020

So, Eric, if the underlying freight environment does not change much between now and into 2020 or by the end of 2020, you think that it’s plausible that the utilization rate will not be materially different than what you have now?

Yes. I think that – as I mentioned in our comments, we expect – we do expect more railcars in the North American fleet to enter storage, but it’s still at a relatively good level. You talked about the small cube covered hoppers. And a year ago, that fleet was well over – or was about 90% utilized. Today, it’s about 75% utilized. But it’s still fairly utilized from a historical standpoint. A few years ago, it’s gotten into the 60% range. So from that standpoint, it feels worse than it is because it’s – 90% to 75% is a big drop. But 75% compared to the overall fleet in the low 80s isn’t that different. So I just want to put that out there that, while it’s lower, the decline has been dramatic in terms of pace, but the level that it’s fallen to is not unprecedented.

Great. Thank you very much.

And we will go next to Justin Long with Stephens.

Thanks. Good morning. Tim, congrats on the retirement and wish you the best. Maybe to start with my first question. You gave some color on a few items for 2020. We’ll clearly have some pressure in the railcar manufacturing business, but you mentioned the lease fleet will grow and there are some cost actions underway. When you put everything together just from a directional standpoint, do you think next year is an up arrow or down arrow for EPS?

Good morning, Justin. It’s Melendy. I would say that, especially given the delivery – the deliveries that we expect, I would say, overall, it would be a down EPS. However, I mentioned that there are a number of levers in management’s control, and I think we’ve demonstrated this year that we will take action on those such that the EPS decline would not be as much as you would expect. So does that give you a good sense?

Yes, that does. That’s helpful. And maybe following up on that, I wanted to ask about railcar sales going forward. Obviously, the guidance for this year was increased. We’re at a pretty elevated level relative to kind of historical averages. And I know this will be a key part of the business going forward, but is there any sense you could give us for what you expect from railcar sales going forward, whether it’s 2020 or just on a normalized basis? And then also the margins on railcar sales, they’ve been around 17% this year. Just curious directionally if you think that’s still a good place to be going forward. Thank you.

So with regards to railcar sales, we did increase our guidance from $350 million to $400 million, and that’s primarily driven by our railcar investment partner demand. And it’s also part of our desire to grow our lease fleet with our investment partners’ capital. I’m not really prepared today to signal specific car sales for 2020, but what I will point back to is, as we set out as a new Trinity company, we said that we want car sales to be – and as we continue to grow the lease fleet, we want car sales to be more of a normal part of the way we do business and we want our RIV program to be more programmatic. And so I believe at the time, we said something like $300 million to $350 million of sales in a given year would be what we were targeting. I see that moderating in years where we don’t grow our lease fleet as much, and so that kind of gives you our general thoughts about car sales without any specifics for 2020. Speaking specifically to the margin, there are a number of factors that impact what that margin is. One is the age of the cars. Another is that type of cars, the market value of the cars that are in the portfolio that we sell as well on those assets. So I would say that we would expect our sales to RIV partners to be in a similar margin range to what you’ve seen historically.

Okay, great. That’s really helpful. I appreciate the time.

And we will go next to Gordon Johnson with GLJ Research.

Hey, guys.

Good morning.

Hey. How is it going? Sorry about that. Just some issues with the phone. Thanks for taking the question. I guess the first question I just wanted to know if you guys, management there, thinks that the investment community gives you guys enough credit for earnings from selling railcar assets between the manufacturing division and the leasing division and if not, how do you plan on addressing that?

We have communicated as I mentioned that our plan is – we consider it an advantage of our integrated platform to have the ability to monetize those assets while at the same time keeping the customer relationship and the servicing opportunity of those assets. So not only do we receive a management fee, we keep the customer relationship, and we have the opportunity for those cars to continue to take advantages of services that are offered by our platform. So our goal is that by making our railcar sales more predictable and more programmatic that those will be considered as part of our earnings and cash flow-generating ability.

Okay, that’s helpful. And then there’s been some concerns. I’m sure you guys have heard about PSR. And some of the shippers kind of, I guess complaining, at least we’ve heard some recent concerns. Have you guys heard these concerns and what’s your view there?

Sure, Gordon. This is Eric Marchetto. I’ll take that. So let me first – PSR is certainly a big topic. Let me just step back and talk about rail transportation and then we’ll get into the PSR. Rail transportation is still the lowest cost and the greenest mode of land-based transportation. So it starts with an inherent advantage. Rail traffic has declined in the last year and that’s certainly had an impact on demand for railcars. When the railroad implements PSR, the first thing they do is they look to right-size the assets on their lines and so that will have – where they will try and get railcars off of their line and then when there is growth, they’re going to have to turn around and add cars at that time, which will either be in the form of shipper cars or railroad cars. The good news on PSR is now we’re hearing for the first time in a few years, more of the railroads talked about growth and driving traffic growth and specifically modal share. We’ve not heard that in the last few years, so that’s real positive that they are going down that path. From an operating system, more efficient operating system, which will lead to a more efficient railroad network would be good for our business certainly, long-term. You mentioned demurrage and other fees related to PSR. Demurrage is incurred on railroad equipment, which is about 20% of the fleet. It’s an unplanned expense for shippers, which no business likes unplanned expenses, so that’s certainly generated points of frustration with customers. There is also other ancillary fees charge, the private railcars and this is going to be a point of frustration with shippers. Generally, the impact of PSR has been principally more on railroad supply cars like well cars, box cars, flat cars. It does impact covered hoppers in the grain service and agricultural service, which is typically a little more or less provided railcars, so that’s one spot where it would have little impact on the operating leasing community.

Excellent. Thanks for the questions. And Tim, congratulations and enjoy the retirement.

Thank you.

And we will go next to Allison Poliniak with Wells Fargo.

Hi guys, good morning.

Good morning.

First of all, congrats Tim. Just echoed everyone’s comments on that. I just want to go back. I think Matt asked the question about lease. Just would like to get your thoughts, just over your philosophy on managing the utilization in that fleet. I know lease rates are fairly stable, but if they take a step down from here entering 2020, I mean how are you thinking about that rates versus duration versus that utilization number?

Sure Allison. This is Eric. I mean that’s always the art, is managing no lessor once railcars go in storage is that it tends to be a negative event in terms of earnings. As rates are falling, you have a decision to make, whether you want to go short on lease terms and it’s generally going to be determined by what those lease rates are if there and what the yields on those assets are, if they are lower than a cost of capital on a yield basis, you go shorter. If they are higher, then you locked in longer-term and that will vary deal to deal car type by car type. That’s certainly something that we are very conscious of and we manage accordingly.

Great. And then I just want to go back to the operational challenges and capacity expansion delays. Can you expand on that a little bit. It just seemed a little bit unusual for Trinity. You’ve always been a great operator. What was going on there and is it something that’s going to continue in Q4?

So Allison, I’ll start with that and Paul can add any color if I missed it. Generally, we’ve had as we talked about on previous calls, this year we have a very high mix of railcars requiring interior coatings both on the tank side and the freight car side. We’ve made investments to expand our capacity in that space. We built cars ahead of that lining capacity and in return, we had – once we started linings those cars, this quarter we’re aligned in the remainder of the year. So that had additional cost and throughput challenges in terms of getting the units that we expected.

Allison, this is Paul. Just to give a little bit more color on that. We had two major capital projects that we took on this year and our unit deliveries were predicated on us getting those projects done on time. Unfortunately, both those projects were delayed for various reasons really outside of our control. So those delays in the project really impacted our ability to deliver units in the third quarter. And as Eric pointed out, we had historically high number of line cars coming into our product mix this year.

Great, thanks. That’s helpful.

And we will take our final question from Matt Brooklier with Buckingham Research. Your line is open.

Hey, thanks and good morning. Tim, congratulations on your pending retirement. So I wanted to follow on to Allison’s question. We know that Rail Group margins are negatively impacted by some inefficiencies in the quarter and obviously lower volumes anticipated that contributed as well, but as we’re looking into fourth quarter, directionally where do we think margins are, do you think Rail Group margins are up, are they about the same, maybe just provide a little bit color there?

Hi Matt, this is Melendy. So what I guided for the full year is a 9% approximate margin for the segment and that would be for the full 2019 year and so that would be I would say a little bit of improvement from third quarter to fourth quarter to make our math work.

And then as I think about it, there is kind of diverging trends in your two businesses as you guys think about it. Next year expectations are that deliveries are going to be down and that’s going to put some pressure on profitability within Rail Group, but the message is you’re doing some company specific things on the leasing side of your business where you think you can grow the fleet and hopefully also improve profitability next year. So if you could just talk to what are some of the contributing factors that you know gives you conviction that you’re going to be able to grow your lease fleet next year in a market that right now doesn’t seem too favorable?

Sure. This is Eric. I’ll take that. Our track record is – kind of speaks for itself, in terms of the growth that we have, the rate of growth in our lease fleet over the last 20 some odd years. Our platform, our market visibility in our platform is unprecedented, our broad product line, our ability to originate leases, so I’m quite confident. We will continue to be able to originate leases that are accretive to our earnings and we will be able to perform. We have line of sight on – we still expect 40,000 to 45,000 railcars or low 40s to mid 40s in terms of industry deliveries. The industry has a healthy backlog. So while as we expect it to be lower next year in terms of industry deliveries, we still would expect them to be relatively good and so it’s a healthy industry. And with that, the demand for leased railcars continues to grow whether that’s through PSR or other trends, the trend has been for railcars, we provided – this shippers provide railcars and they typically provide them through operating leases. Nothing is going to change there.

Yes. This is Tim. Another thing that you’re taking in consideration, during the slower demand periods that we experienced historically, there are people that want to sell assets and railcars for a variety of different reasons and we picked up a lot of nice railcars during those time periods and this is shippers that want to sell railcars or other leasing companies.

Correct.

So I guess the message is doing the things you’ve done in the past you believe should enable you to grow your market share and given kind of the environment and things being a little bit weaker here, you think there is opportunity to potentially acquire cars portfolios which will be additive I guess to the growth story?

Yes, all of that. Our platform is built to perform throughout our cycles whether it’s a – when you look at railcar manufacturing, the thing you can count on is change year-over-year whether that’s up or down and we’re used to that. We measure us by improving our returns in the business year-in and year-out and that’s what we’re going to do.

And then just finally, I think someone did mention it on the call that in a market that is a little bit weaker, maybe the pricing environment on new railcars has gotten a little bit more competitive if I heard that correctly. Can you talk to directionally how much pricing has changed and I guess your expectations going into next year. I’m trying to get my arms around if we could see some incremental pressure in terms of new car pricing across the industry as we move into 2020? Thanks.

Sure. When you looked at – this is Eric again. When you looked at existing lease rates, we’ve seen modest declines in lease rates in the current quarter and as we looked at these lease rates and compare it against our expirations next year, we see a modest decline in lease rates. When you look at new car pricing, new asset pricing has come down somewhat slightly, that’s probably more of an impact on raw material prices coming down, some steel prices have fallen, both steel plate coil and scrap prices, so all that has an impact. Margins, the orders that we took in the third quarter on for sale. Those margins I’d characterize is always good. So from that standpoint, it’s good. Our new car lease rates, interest rates have fallen, so certainly we’ve seen lease rates on new assets come down a little bit. As a result, generally there is probably – in periods like this you get a little bit wider range of pricing, we do see some shippers subleasing railcars in the market and generally when they start subleasing railcars that can have a downward impact on lease rates.

Matt, are you there? Operator, we can go to the next question.

Certainly. And we do have an additional question. It comes from Steve Barger with KeyBanc Capital Markets.

Hey, thanks. Tim, as you and the Board think about setting up Trinity for the next leg of its history, for the external candidates are you considering people from outside the rail world or more broadly from outside machinery manufacturing?

Yes.

Great.

Well, we’re just very– the Board is very open-minded. We have recruiters and they’re looking for people that they think who come in here and take charge of the organization and provide some superior leadership as well as internal candidate. So they are very open-minded.

Got it. Thank you. And Melendy you said you expect free cash flow before fleet investment to improve next year, but any thought. Is there any environment where you would envision free cash flow will be positive including lease fleet investment?

We really haven’t put that fine of a point on it to this point, Steve. As I mentioned, the primary driver of free cash flow improvement before lease fleet investment for next year is that our business will be consuming less working capital.

Right. And then just the environment will dictate what the size of the lease fleet investment is?

Well, and if you can think about the lease fleet investment, net of financing that we would do as we have leverage to – as we grow the lease fleet net leverage to that, the net of that financing, our free cash flow before lease fleet investment and after financing would still be positive for 2020.

Got it. And one last one. Your buyback program so far this year has a higher average price than the current share price. Can you talk about your thoughts about buying shares in the weaker industry conditions as we look into 2020 and has the Board considered other ways to deploy capital, maybe a special dividend or something else?

At this time, we are operating more in an opportunistic share buyback and we’ve tried to be very programmatic and we have increased, you saw it in third quarter, increased our share repurchases as the share price declined and so we expect to continue to regularly and programmatically repurchase shares. As far as the Board’s consideration for any other deployment of capital to shareholders at this time, there hasn’t been discussion about anything such as a special dividend, but this is a topic that is routinely discussed with our Board and it’s something that we will stay flexible as the market gives us the opportunity to make the appropriate decisions to return capital to shareholders.

Got it. Thank you.

Thank you.

And this does conclude the Q&A session. I’d like to turn the program back over to Jessica Greiner for any closing remarks.

Thank you. Aaron. That concludes today’s conference call. A replay of today’s call will be available after 1 o’clock Eastern Standard Time through midnight on October 31st 2019. The access number is 402-220-7205. A replay of the webcast and definitions and reconciliations of certain non-GAAP measures discussed during the call will also be available under the Events and Presentations page on our Investor Relations 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.

Thank you for your participation. This does conclude today’s program. You may disconnect at any time.