Good day everyone and welcome to the Trinity Industries First Quarter Results Conference Call. And at this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions]. Please note this call maybe recorded and I will be standing by, if you should need any assistance. 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 business issues and risks, a change in which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. It is now my pleasure to turn today's conference over to your Vice President of Investor Relations and Communications, Jessica Greiner. Please go ahead.

Thank you, David, and good morning, everyone. I'm Jessica Greiner, Vice President of Investor Relations and Communications for Trinity. We appreciate you joining us for the company's first quarter 2020 financial results conference call. We will begin our prepared remarks with comments from Trinity's Chief Executive Officer and President, Jean Savage; followed by Melendy Lovett, our Chief Administrative Officer. Eric Marchetto, the Company's new Chief Financial Officer will provide the financial highlights. We will hold a Q&A session following the prepared remarks from the leaders of team. Joining the call today, we will refer to a few slides highlighting key points of discussion. These supplemental materials are accessible on our IR website at www.trin.net. These slides can be found under the Events & Presentation portion of the site along with the first quarter earnings call event link. It's now my pleasure to turn the call over to Jean.

Thank you, Jessica, and good morning everyone. The economic events and governmental action surrounding the Coronavirus are unprecedented. And I'm extremely proud of the response from the men and women at Trinity. TrinityRail is designated as an essential business by the North American federal authority. The executive leadership team and I, first and foremost would like to commend our employees for their service and commitment to health and safety, to business continuity, and to keeping critical supply chains operational. We thank you for your work, your spirit, and your dedication to excellence, which all reflect the strong culture and heart of Trinity. We'd also like to thank our customers, suppliers and all of the businesses working to ensure our communities stay safe and have access to all of our daily needs. Of course, we want to express our deepest appreciation for all of those on the frontlines in fighting COVID-19. We're most grateful for your commitment and service. We're proud of the function our employees and our railcars perform in sustaining our communities. Not only does the rail industry play an important role in preserving our planet as the most sustainable mode of land-based transportation, rail transportation is the livelihood of the North American economy. Railcars are a critical part of the supply chain of nearly every market. We all depend daily on food, treated water, energy generating commodities, and medical grade product. All goods delivered through the rail supply chain. When the going gets tough, the tough get going. I believe Trinity's commitment to excellence and the rail platform will once again prove our ability to withstand an economic crisis. In my prepared remarks today, I want to cover three main points, the impact of COVID-19 on our business, and our actions to address it; the financial resiliency of…

Thank you, Jean, and good morning, everyone. Our first quarter results reflect the commitment and execution on a number of actions taken to align the company's organization with our go-forward rail strategy and to improve business performance. While we recognize the current environment will make accomplishing our financial priorities more challenging, we have not lost sight of our longer-term goals. Our primary objectives as a leadership team are to protect the health and safety of our employees and to ensure business continuity and capital preservation. Fortunately, the steps we were taking to optimize the company's cost structure were timely and advantageous given actions needed amid the COVID-19 crisis. During the company's fourth quarter earnings call, we announced a target reduction of $25 million to $30 million in administrative costs across the organization. In the first quarter, the company took action on savings totaling $9 million to $10 million which included employee reductions and the consolidation of our logistics and equipment services businesses into the operations of the Rail Products Group. It also included the decision to relocate our corporate campus to a more cost effective location and the disposition of a non-operational facility. These actions resulted in a restructuring charge of approximately $5.5 million. Additionally, management has identified savings of $15 million to $20 million that we expect to take action on during the next few quarters as we realign our organization and streamline administrative support costs. When combined with the cost saving actions taken throughout 2019, total reductions in SE&A and other administrative costs are nearing $60 million. We're committed to accelerating the performance of the platform through effective and efficient alignment of our organization and we will provide updates on our cost optimization progress through the year. Another key priority for the company has been the optimization of…

Thank you, Melendy, and good morning, everyone. I'm honored to be assuming the CFO position after 25 years of service to the company. I look forward to working with our stakeholders in this role, as we continue to improve upon both the effectiveness and efficiency of our platform and to drive enhanced performance and value-creation opportunities. With the onset of the COVID-19 outbreak, we've implemented preventative measures without significant interruptions thus far to our daily operations. However, we expect that there will be negative financial impact to our business, and we will adjust accordingly. While there were a number of moving pieces in the first quarter within Trinity's corporate line items, and consolidated results, the operational performance of the railcar leasing and products businesses were slightly better than our internal expectations. The Leasing Group's revenue and profit from operations grew year-over-year primarily due to growth in the lease fleet and higher average lease rates. The change to our depreciation policy also contributed to the increase in the segment profit margin. During the first quarter, we completed a small portfolio sale to one of our ROE partners demonstrating the value of railcar assets with leases attached, even in a state of heightened financial market disruptions. Rail Products Group delivered just over 3,700 railcars in the first quarter, while reducing production capacity within our manufacturing facilities. As I mentioned on our February earnings call, we expected these margin headwinds from the inefficiencies in slowing our production and reducing our manufacturing capacity and headcount. Commercially, we were impacted by the evolving uncertainty within the industrial market and lower North American railcar loadings. Lease fleet utilization declined to 95.4% and new railcar orders for the quarter totaled 1,970 railcars. By our analysis, we believe, approximately 80% of our customers operate as essential businesses and…

Thank you, Eric. As you can see from our first quarter performance, Trinity is taking steps to align our cost structure to our current demand environment. We're doing this amid challenging market environment and in accordance with our longer-term plan to accelerate Trinity's performance through the cycle. Given the limited visibility in the market stemming from the Coronavirus, we're not providing financial guidance at this time. Like numerous other companies have stated, we cannot predict at this time the impact or duration of COVID-19 and the collapse in energy prices on our business or the impact to our customers and suppliers businesses. We're highly focused on scenario analysis, business continuity, and contingency planning and preserving and bolstering our liquidity position. Fortunately, Trinity has long duration lease contracts that protect against market disruption and a solid backlog in which we can flex our capacity to right size for demand. We do hope to put forth a broader framework for Trinity's strategic roadmap on our third quarter call in October. However, for the time being, we thought it would be helpful to give you some context behind the scenario analysis, we performed on the financial position and condition as a company as guideposts. Slide 5 of the supplemental materials provide a summary of the inputs to this analysis. These scenarios also provide a framework to guide our capital allocation decisions in the current market environment. The base case scenario assumes the economy reopens in the near-term and railcar loadings begin to improve sometime in or around the third quarter. In this type of environment, we would expect that our lease fleet utilization remains approximately 95%, as our backlog delivers that we transact a modest amount of leased railcar portfolio sales and achieve our SE&A optimization target. In our stress case scenario, if…

[Operator Instructions]. We'll take our first question from Allison Poliniak with Wells Fargo. Please go ahead. Your line is open.

Hi guys, thanks for taking my question and congrats Eric on the appointment, well deserved. Just want to go back to the commentary around lease rates; they were pretty favorable for Q1. Was there something unique to those cars and maybe can you talk through how things are trending as you know this, I guess pandemic accelerates here in the U.S.?

Thank you, Allison. This is Eric, I'll take that. So I would say that the increase in our lease rates was the average lease rates in our portfolio that is more impacted by the ins and outs of our portfolio in terms of what we added to the fleet and what we sold to the fleet. In terms of absolute lease rates, we're like we said in our last call, we are still seeing headwinds on lease rates and with railcar loadings trending this way they are, I'd expect that trend to continue in the near-term.

Understood and secondary market, you've been pretty active selling into it. It seems obviously just given the concerns from the macro side that dynamic could be switching. Any color there or could you seek some consolidation even among the smaller players here, any thoughts on that?

Sure. This is Eric again. So we did have -- we sold about $110 million worth of railcars in the first quarter. I thought, and that was -- we sold those in March that was kind of the height of the uncertainty, especially the volatility in the equity market. So I was pleased that we were able to execute. As we go-forward, and as Jean mentioned, in some of our stress cases, that is a scenario that we’ve stressed in many of our situations, the ability to transact, if it does not -- if it's not a seller's market, and that may turn into a buyer's market, and I just don't know where those market clearing prices are in order for people are going to sell portfolios. I'm not expecting to see distressed portfolios in the near-term but the longer this goes maybe that changes.

Great. And then just one last question from me, just want to understand your philosophy between utilization and better lease rates. Obviously, we'd like both, but in this kind of scenario, what is Trinity focusing on? Are you focused more in utilization or lease rates, how are you balancing that here?

Yes, this is Eric again. I would say right now we're focused more on utilization. Even with our utilization going down, we’re focused on utilization to the extent railcars are needed. The less -- if a customer does not need the cars then there may not be a rate that maintains that. We're still renewing railcars. And we expect to continue to renew railcars on expiring leases this year. There will be some rate headwinds as we go-forward, though.

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

Thanks for taking my questions. Maybe wanted to start with one on return but totally understand 2020 guidance being withdrawn but you did have this three-year ROE target for 11% to 13%. I was wondering if you could provide an update on that target and the timing of that target. As we think about the assumptions that you have embedded in getting to that 11% to 13%, do we need to see a return to normalize the lease rates and normalize build rates to get there, or are there enough levers that you can pull that are company specific to hit that target, even in a below replacement market?

This is Jean. Thanks for the question, Justin. While the current environment will make achieving our long-term targets in the original timeframe extremely challenging, we're still committed to achieving these targets in due course. I would expect, with the uncertainty in the market right now, it'll take us a little bit longer to decide if we have levers that could keep that on track, but I think the headwinds will push that out a little.

Okay. And on the headcount savings that you called out of $9 million to $10 million, is that number included within SE&A cost savings target of $25 million to $30 million and may be as you think about this downturn and the stress case that you mentioned and had the slide on, is there a way to think about the incremental costs you could take out in that scenario beyond what you you've outlined that $25 million to $30 million?

Hello, Justin, it's Melendy. Yes, the $9 million to $10 million that I mentioned in my prepared remarks is included in the $25 million to $30 million goal that we announced in the fourth quarter. And as I said in my prepared remarks, we have identified and plan to complete that $25 million to $30 million goal this year. As we laid out in the stress case, if we see further contraction, if we see the COVID-19 situation extended, we're prepared to make further reductions.

Okay. Maybe just one last quick one on the guidance for operating cash flow to be positive this year, could you talk about the change in working capital that's assumed within that guidance? And does that also include the $300 million tax benefit you mentioned?

Hey Justin, this is Eric. So I'm not going to give you specific working capital guidance. But when we talk about operating cash flow as our production volumes declined, there will be some natural working capital gains that we pick up through the year as our run rates decline. And that's typical. We've experienced that in previous cycles as well. And in terms of the refund that is included, and that is part -- that will be part of our operating cash flow. As we talked about previously, even without the CARES Act, we would expect a positive operating cash flow for the year. We're focused on liquidity. We're going to, we plan, as I said in my comments, we plan on maintain that liquidity throughout the year. And we have levers to pull to make sure we maintain that.

And as I mentioned in my remarks, we're going to right now have $350 million to $500 million in potential new lease fleet additions, $100 million in manufacturing CapEx, and between $150 million and $200 million in shareholder returns through dividends and the share repurchases and we're still expecting to maintain our liquidity.

We'll take our next question from Gordon Johnson with GLJ Research. Please go ahead. Your line is open.

Hi everyone. This is James Bardowski on for Gordon. Thanks for taking my questions. So I have one first on the utilization and balance sheet optimization program, the leasing, Leasing Group. So, the targeted leverage of 60% to 65% on your balance sheet optimization program, it depends on the size of your fleet, as well as correct me if I'm wrong, the expected size of your fleet in the years ahead. So last quarter knowing that utilization fell to 95.4%, I believe it was. Now while you said that there's been little effect on leasing customers, you did acknowledge that loadings are weak, rates are weak -- weaker relative. So if we don't see any kind of sharper recovery, but it's more of an L-shaped recovery, customers do start to cancel orders. How low would you tolerate fleet utilization to fall before taking action to manage your fleet down and guiding into expected leverage that was tied to future fleet growth.

Hey, Gordon, this is Eric. Let me try and James, I'm sorry, take that. I know when we look at the stress case and we modeled, in a stress case environment, we expected utilization there, we saw our utilization to get below 90%. And even within that, we thought the business performed well or performed adequate and through the cycle. In terms of would we start, I think that what you're asking is would we sell off assets in order to preserve leverage. Is that just?

Exactly.

Yes, that's certainly -- that's certainly a lever that we have because we have such a large unencumbered lease fleet where as I mentioned is $1.5 billion, we believe that gives us a lot of financial flexibility to either sell assets or finance assets to maintain or expand liquidity. And so -- and that's kind of not necessarily utilization centric.

Okay, that that is very helpful. So there's not -- basically there's not a set target where you would start to accelerate sales out of the lease fleet, if let's say, fell to 88%?

No, no, there's not. I mean, it's going to depend on what -- what's going on in the secondary market. If there's opportunities to sell assets, that would be an option. But if utilization fell that far, then we assume -- one of the things we assume was we wouldn't be able to sell many assets because of the state of the market. So it's kind of worked against that stress situation.

And then quickly turning to the rail fleet, I noticed that new orders fell again for fifth straight quarter on year-over-year level. And you didn't mention the cancellations now remove the crude oil aspect from your backlog, albeit you still have exposure through your utilized fleet currently. Now, is that to say that you basically you don't expect any cancellations going forward, or is there any other kind of shaky areas that that we might expect to see an additional wave of cancellation? I know you mentioned agriculture is strong but is there any other sectors where you see potential growth offsetting that can maybe help your orders?

Sure, James, this is Eric again. I'd say longer-term and even this year, the biggest driver that's still going to drive new orders is going to be replacement demand. Replacement demand is the single largest driver for new railcar deliveries and new railcar orders. I don't expect that to go to zero as we've seen in other cycles, it does become a bit of a buying opportunity for customers with a longer-term view to buy assets at this part of the cycle, so I don't expect that really to happen.

And we continue to get some orders even in the past week; we've received several hundred orders. So even in the midst of the challenges, customers still need some of these railcars.

Okay, that is very helpful. Thank you. And then finally, one more question and then I'll hand it off. So, you did mention one of the reasons for the contraction in your market -- or for the decrease rather in your margins in the Rail Group related to "inefficiencies". And looking back historically, it does look like your costs operate on a lag. That said, given the move to cut your utilization, how -- is there any kind of expectations that you could give us as far as what to expect for margins for potential costs in the Rail Group maybe for the second quarter?

James, we're not doing any forward margin guidance. We hope to give that in our next quarter call should things stabilize.

Okay, that's helpful. Actually and then real quick, if you could, how many of the railcar orders in the first quarter, how many were for the Leasing Group?

Roughly about little about half, little more than half of the orders were for leasing.

Little more than that, all right. Thank you very much. Appreciate the time.

Thank you for the interest.

We'll take our next question from Matt Elkott with Cowen. Please go ahead. Your line is open.

Good morning. Thank you. I have an industry question first. I think maybe Eric this is for you. There's a big number of cars idle right now and we know some information about the types but not the subtypes. Do you have a sense of what percentage roughly of that idle supply of railcars is never going to come back even if no matter how demand, how much demand comes back, meaning they may be dated DOT 11 tank cars that are just not going to be able to be used in anything and are just waiting for the right scrap price to be taken out of the idle population?

Matt, this is Eric. Put me on the spot for giving opinion, right. There's not great data on that. But we've done research within our fleet and some other things that we've looked at and the railcars and storage numbers as I've mentioned on previous calls can be a little bit deceiving. But the trend line is I think what's more important. If we had to put a number on kind of that long-term storage and I'd define long-term storage as if it hasn't been used in a year or longer then I would kind of deem that as surplus or destine to scrap. I would put that number in the 70,000 to 90,000 railcar bucket. I think the principal car types that make that up are going to be some of the higher mount boxcars and some older covered hoppers and then some of the old coal cars. I hope that helps. But that's my opinion.

Yes, you can work with those numbers. Thanks for the opinion. And then this I mean, it may be self-explanatory, because it's called base case scenario, but I just want to make sure that the base case scenario that you guys are presenting is the scenario which you think -- knowing what you know now is what you think well is more likely to happen.

So, Matt, this is, Jean. I just want to say some of those of guardrails; we've run many, many scenarios. We wanted to give you confidence that we've looked at what levers we have to pull based off the changing environment. But until the industry stabilizes, and we know what's going to occur, we can't in any effect give you guidance on what we think is or is not going to happen there.

Got it. And then did you guys say what percentage of your current backlog which I think is 30,000 cars is for delivery this year?

We did not. But it will be in our Q and it's about 10,000 railcars are scheduled for delivery this year.

And based -- under the base case scenario, there's no risk to that number you think?

Under our base case scenario, as we said, that delivers in our base case.

Okay, got it. And also Eric, I think you gave some utilization numbers on -- in the lease fleet on crude and frac, I think 4% of your lease is crude and 8% is frac of the lease fleet?

That was not a utilization number, that was last serve -- of our fleet, that's the last service.

Okay. So it's not 4% of the utilized fleet?

It is not, it is 4% of our total fleet. And that's a good question actually because --

What's your amortization on those cars?

So it's on the 100% of our fleet. It is -- we looked at the last content. And so if there was in crude and it's currently idle, then it's a crude car. It was in frac sand and it was currently idle it's a frac sand car. We're not breaking out the utilization by the individual car types. But 8% of the -- of our fleet has a last load of frac sand and 4% has a last load crude.

Okay. So the actual percentages of the utilized fleet are meaningfully lower than 4% and 8%?

I think I understood that. I think the answer, I'm not sure I follow the math on that.

Yes, I mean, yes, I think your fleet realization is 95%?

95% right.

Of that population that's utilized, if the percentage that's crude and frac is lower than the 4% and 8% you gave?

Right, yes the number -- yes, the number of car, yes, that's right. That's right.

Got it, got it. That makes sense. And just one last question. Can you give us any underlying assumptions for the stress case scenario that you're using macro assumptions?

We were looking at really the railcar loading not to start come back into the second half of 2021. So it was a later recovery of the overall industry.

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

Thank you. On production, I understand the unwillingness or caution around guiding anything. But, I mean, you took production rates down 50% or close to it in a single quarter, could you share with us what the runway on a weekly or a biweekly or monthly basis what's actually in a quarter, so we can kind of get a sense of how things are moving right now before any further adjustments?

So on manufacturing, we took in the quarter, so from the end of last year through the first quarter we had a reduction of 30%, so just want to make sure that was clear in the headcount.

Headcount, production headcount.

Yes, I was asking about the production rate and delivery rates?

Okay.

Yes, Bascome, I'm sorry. We're not going to give -- get into the run rates for competitive reasons and for guidance reasons, but we did take those actions throughout the quarter. Many of those actions that we did in the first quarter weren't necessarily COVID-19 related. We've talked about those in our February call that we were going to -- we expected our production to decrease. So the extent there's further declines in that then from COVID, then that would come out of that number.

And are you running all three of your primary production locations below capacity? Or is there an opportunity to consolidate some of that in a weaker market?

If you look back over the years, we've consolidated a lot of our manufacturing assets. We currently are operating three facilities or major facilities on the new production side. We've -- we will continue to look to optimize that and it depends on where it goes in terms of we want to operate one, two or three facilities. Jean, anything you --?

No.

Thank you. And a couple on leasing, then I'll pass it on. Is the Rail ABS market open today? Should you want to access that? And do you have any sense of the kind of coupon rates in collateral advanced rates that we might see?

Bascome, this is Eric again. I believe that when the time comes for us to access the ABS market, we will be successful and access in it. I think spreads will be a little bit higher than the last year we did. But with the overall benchmarks low, I think the coupon will likely be higher than what we achieved previously. But it kind of depends on when we do access to markets, but I believe they'll be open.

Do you I mean advance rates, I think you've historically been in your last few deals in the high 70s. Do you think there's any give on that as well?

It depends, that's possible. It's always a trade-off. And a lot of times it's -- you have flexibility in all of the markets, how much you want to push the advance rate whether you do different assets or natural to be tranched, if you do a single transaction, single tranche transaction, the advanced rate may be a little bit lower. But it's a little bit of inside baseball in terms of securitizations. But I would expect that it would be similar to years past.

And last one from me, the crude and sand exposures. I appreciate you disclosing that, if we could get it up to 12% of the car count in your fleet. Would that number be meaningfully different if we were to size it up as a percent of book value or maybe a percent of current or committed revenue? And maybe to book in that, are the customer conversations that you're hearing where they're requesting financial relief or payment deferrals, are those coming from these end markets or is that more broad? Thank you.

Okay, great. This is Eric, I'll take that. So in terms, if you look at it from a book value, what we disclosed as a unit count, when you look at it from a book value perspective in total, it’s going to be pretty close to that 12%, when you add them up, and the book value -- the one will be -- on average, it'll come out about that number. When you look at the revenue, I will tell you on the frac sand cars that 8%, if you look at the revenue in the first quarter that would have been about 4% of our revenue in the quarter. And so and then the second part of your question around lessee discussions. Those would be included in that number but we're seeing requests from a broader market than just frac sand and energy. The impact has affected many customers and many industries. So we’re seeing -- we are talking to many of our other customers.

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

Good morning everybody or good afternoon. I know you don't want to get into guidance. But if current conditions are basically what we get for a while, will the next few quarters just look like 1Q in terms of deliveries and consolidated operating margin or directionally how should we think about the second half versus the first half, just based on what you can see now?

I would expect that the second quarter will be more challenged than we were in the first quarter based off of the environment that we're operating in currently.

Okay. And just as you think about the back half or is any color there?

So again, we do have the base case and stress case. And remember in the stress case, I said we were looking for the rail loadings to start to recover to the second half of 2021. So I would refer back to that stress case on what we might expect.

Yes, we really appreciate you providing that base and stress case. I guess just as you think about that stress case, if that were to play out, just in terms of a range, does operating margins stay high single-digit, or does it fall to the mid-single-digit, any just broad kind of expectations?

Yes, we're not getting into guidance. I would -- so I'm not going to comment on that right now. We hope to give you more guidance information in the second quarter in July.

Got it. And just one more then, I get that mix in production runs matter but just rough math, what is the minimum railcar production level you need to stay to break-even, to stay break-even in the Rail Group?

Steve, this is Eric. Let me just say that the breakeven analysis will depend. And it depends on if it's a smooth production cycle. If it's a smoother production cycle, your break-even points can be lower. If there's a lot of volatility, it's going to be higher. As I mentioned earlier, one difference in our platform today versus 2009 and 2010 is we're operating fewer facilities. And I think we have a, more of a variable cost structure in those facilities. And so I would -- that by itself should be a -- been a low -- been a lower break-even point. But life's not -- there's -- we're not all things being equal, so it's hard to get into where an actual break-even run would be.

And there are no further questions on the line at this time. I'll turn the program back to Jessica Greiner.

Thank you, David. 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 May 7, 2020. The access number is (402) 220-1111. A replay of the webcast will also be available under the Events & Presentations page on our Investor Relations website. We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.

This does conclude today's program. Thank you for your participation. And you may now disconnect.