Welcome to the Second Quarter Results Conference Call. All participants are currently in listen only mode. 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, exceptions, 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. I would now like to turn it over to Jessica Greiner, Vice President of Investor Relations. Please go ahead.

Thank you, Bree, 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 second quarter 2020 financial results conference call. Our prepared remarks will include comments from both, Trinity's Chief Executive Officer and President, Jean Savage; and Eric Marchetto, the Company's new Chief Financial Officer. We will hold a Q&A session following the prepared remarks from our leaders. 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 second 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 pandemic and economic events of the second quarter created a very challenging operating environment for Trinity. Today, I'd like to share with you trainees responses to these challenges, and our longer term plans to become a return focused company. And these typical times Trinity's leadership and employees remain focused on taking the right actions now to best position the Company for future success. Our first priority remains the health and safety of our people including the protocols we implemented to help prevent the spread of COVID-19 and our production facilities and offices, in alignment with CDC and WHO guidance. I want to thank the people of Trinity for their hard work and continued focus on safety. Together, we are ensuring Trinity high quality railcars continue to deliver essential goods across North America and the world. We experienced weak railcar demand in the second quarter, due to the economic ramifications of the pandemic and the major energy price and demand declined earlier in the year. The major decline in crude oil prices led to a number of bankruptcies for frac sand providers in the second quarter. As a result, Trinity reduced the carrying value of our small cube covered hopper fleet in our lease portfolio. Derek will discuss more details about resulting actions we've taken in his prepared remarks. While railcars loading have improved somewhat and recently, increasing COVID-19 cases in the U.S. potentially threatened the resurgent economic and real market activity. We are closely monitoring our supply chain and engaging with our customers to keep our production plan and lease fleet operations aligned with a demand for railcars and related services. Industry metrics reports that approximately 32% of the North American railcar fleet is underutilized. We expect the pricing environment for rail…

Thank you, Jean, and good morning everyone. Trinity's performance in the second quarter reflects the steps we're taking to create liquidity in the near-term, while improving our returns for disciplined capital allocation. We're not providing specific financial guidance given current uncertainty, but we believe the Company will continue to generate significant cash flow due to the resiliency of our platform of businesses and our inherent financial synergies. Referring to Page 5 of the supplemental material, we're focused on maximizing the cash flow of the businesses and maintain a strong level of liquidity. As of the end of the second quarter, the Company had liquidity of nearly $710 million. Our liquidity position is further enhanced by the recent $225 million financing noted in our press release We continue to expect over $300 million of cash refunds the prior year tax losses by year-end resulting from tax provisions in the CARES Act. Our June 30th balance sheet also reflects our expectation for an additional $150 million of cash tax refunds to be received in 2021 associated with our 2020 tax year, demonstrating the value enhancing tax after use of our platform. Furthermore, Trinity has encumbered assets of approximately $1.6 billion as dry powder, which could be available for monetization through additional leverage for secondary market transactions. We believe our balance sheet and financial strength enables Trinity to navigate the COVID-19 pandemic and capitalize on opportunities that may emerge for value creation. We work diligently to maintain diversified portfolio railcars, manage the credit profile of our customers and stagger our portfolio explorations to maximize risk adjusted returns. On our last call, we've referenced challenges faced by many of our frac sand customers as a result of the one-two punch from the structural changes within the frac sand supply chain and the drastic fall…

[Operator Instructions] And we'll go first to Steve Barger with KeyBanc Capital.

So, first I just want to big picture question. One of your leasing competitors talked about how just years of strong deliveries have resulted in overbuild. That's going to take a while to unwind by building below replacement. So first, can you tell us how you think about that, both in the context of your position as a leading OEM and then from your perspective as a lessor?

This is Jean. I'll go ahead and start, Steve. Thanks for the questions. When you look at it, it's really going to vary by the different markets, that you're looking at and different prototypes that go into those. So some of our top car types were already seeing a pickup in momentum there, agriculture is one of those. Flat cars and also vehicular flats and boxcars are already seeing the upswing and we don't have as much of new repeat in there over supply maybe to absorb. If you look at some of the harder areas, say energy right now, they will be absorbed. It may be a little bit slower for that absorption to happen. But overtime, you'll see some of those cars start to age out and need replacements or you will see them go out because of HM-251 or other requirements to upgrade that car type.

And so, I guess to that point about the various car types, you mentioned in your prepared remarks that you have inquiries that you expect to convert to orders of lease contracts. Can you talk about the size of any of that in terms of units?

So, I can't talk about the size, but I will tell you they substantive, well above what we had in the last quarter.

Okay. And so, you said that, slots in the back half were basically sold out. Is the 2Q run rate are reasonable way to think about production for the back half just for our models?

So coming out of 2Q, we are holding some people toward the opportunities that are in front of us. If those do close shortly, we will have to start production in the third and fourth quarters to be able to meet the delivery timeframe for those orders that are out there. And so, I would say that, if those don't come to fruition, we will have additional downsizing in the third and fourth quarter.

Steve, this is Eric. I'll just add to my comments. I mentioned that 41% of our backlog value we expect to deliver by the end of the year, so that will give you a little more insight in run rates.

Perfect. And just one more and I'll get back in line. Just similar question on revenue per car, is the mix that you expect in the back half, similar to what you saw in 2Q in terms of revenue per car?

Yes, our mix is going to continue to change as it slows down, so I'm not sure it'll be an exact one for one just as the mixed. It'll become a little less tank car weighted as we move on. So that'll have a bit of an impact on the ASP.

And we go next to Matt Elkott with Cowen.

Can you guys talk about your, the manufacturing margin outlook in both the base case scenario and worse scenario? Just trying to gain how much more operating manufacture margin pressure we could see while we deal with this environment?

Sure Matt, this is Jean. I'll take that one. So, as we look at the year, as I just mentioned, with a deal that we're currently negotiating, we are holding on to some headcounts to make sure that we can meet their production if necessary. If those do not happen, we have additional optimization or rationalization that we have to do. We also have some work to do where we'll be taking out some of our higher cost footprint. We're going to be reducing our manufacturing support functions and administrative overhead costs, as you work through that, you're going to have a few bumps and bruises along the way in that transformation to get you to the point where you need to be long-term. So, I would expect that as we finalize those, you may have some pressure, but if we close those deals, you may have some tailwind coming in.

And you've mentioned potentially looking at some high cost manufacturing footprint to rationalize or convert or get rid of. I think historically in the last several years you guys have manufactured most of your cars in Mexico. First of all, how has the split between Mexico and the U.S. been this year during the pandemic? And would the facility that could be eliminated with maybe in Mexico or in the U.S.?

So when you look at it, we have manufacturing for new cars in both the U.S. and Mexico. And we see ourselves continuing to have both of those. One area that we have recently closed is our wheel shop that was here in the U.S. and outsourced that product. We're also looking at outsourcing some additional fabrications that are lower value for us. That would give us; one, the ability not to have to have as many people to produce a car; and two, to look for some opportunities to reduce overall costs. So that's the direction that we're heading.

And just one more follow-up on the uptick in orders question. I think you mentioned an uptick in inquiry as obligate. Can you give us an idea on how much of that is financial buyers looking for cars with lease attached to deploy capital to how much that is shippers with underlying freight needs looking to lease cars or potentially shippers looking to buy cars that are now manufactured?

So I'm going to start and then let Eric jump in on this one. We've really seen the opportunistic buyers come out. We're in a down cycle right now. Pricing is getting aggressive and those who have some aging fleets that want to replace them or have some additional demand are coming out and looking for those opportunities. So, that's where we're seeing it happen, and Eric, if you want to add to that?

Sure. When we're talking about converting inquiring to orders, we're not talking about portfolios or railcar leases. We're talking about users of the railcar equipment that have demand. And as we mentioned earlier, replacement is still a big driver. And I think that replacement demand will be a larger driver rather than growth demand over the next several quarters and that's where we're seeing opportunities as users of rail equipment that have some discreet replacement opportunities that they're looking to take advantage of the current market.

Just a quick follow-up on the order questions, I think you guys got 40% or just over 40% of the of the orders of the industry or this quarter or in 2Q. That's slightly above, meaningfully above, what you've done in the last several quarters, where it seemed like you were lees aggressive with orders. Is there any -- are you reading too much into this? Or is there any change of strategy? Are you willing to take more 50 orders here, 50 orders there during the downturn? Or is it just an anomaly?

Yes, Matt, so those numbers just came out as we were preparing to kick off the call, so I haven't had a chance to look at a lot of them. When you look at, when you're talking about quarter orders for the industry of 1,900 units is probably too small a number to really get a lot of trends from. I would say that the orders that we took in the quarter were a little more leasing weighted than we had been running and they're more specialty railcar related. The nice thing about specialty railcar is, they tend to have a little higher margin than some of the other railcars. So, we're real happy with the level of orders that we took. The fact that it was 44% of the market is more of an outcome. I wouldn't say it was anything delivered on our part in terms of that.

We'll go next to Gordon Johnson with GLJ Research.

This is James Bardowski in for Gordon. Thanks for taking my question. Just had a question on your capital allocation, now you had -- you guys didn't have any stock buybacks last quarter, for the first time in a while. Now, I know that have a lot of liquidity on hand, but your relative price to book value is now currently above your peers in the leasing group. So, effectively, one of your targets has reached, another target you guys had more internally, of course, is your leverage targets. I believe it was between 60% and 65% loan to value. Last quarter at 57.1, it should be a bit higher with the 225 million facilities you disclosed, correct? So that said, you now even close to 60% to 65% target. So the question is. Should we expect the lack of stock buyback to be the new normal? Or are you raising your leverage targets?

So, I'm going to say that in the last quarter, the reason we weren't in the market actively buying was we had stated that we wanted to ensure that our liquidity and cash for were good. We're still trying to see what was playing out with COVID-19 and what that meant for the market and for the future, what was going to happen. So, that was the pause. Eric mentioned in his script that, we still have $90 million available to us for our stock share repurchases, and that will go into our future thinking for the capital allocation.

Yes, James, I'll just add that the main thing that we just did, doesn't necessarily, isn't just additive to leverage. Some of that will sort of proceed that will be used to pay down a revolver and our warehouse. And as Jean mentioned, we look at from our capital allocation, we're going to still generate a significant amount of cash flow, and share repurchase is one of the things that we'll look at in terms of what to do with that cash that we're going to generate.

Jean, Eric, thank you. That is very helpful. Then I just have a real quick follow-up. I thought you guys saw $17 million you mentioned in the press release that you have in cost savings currently underway. Just quickly, how much of that is a cyclical or variable versus fixed? And how is that allocated amongst segments? Thank you.

So, James, one thing, if you look at Slide 4, it does talk about executing year-to-date, we've got $58 million, total identified of $17 million. When you look at cyclical it's showing $38 million executed and $14 million identified. So one thing that I want to draw your attention to is, the fact that, we are looking at outsourcing some of the lower value fabrication items, which will also change some of that cyclical reduction to a more permanent status. So, when you are asking for the percentages, I'm going to look at Eric. I have not looked at that way, and I don't know that we have that answer.

And I think that's the answer.

Thanks.

Justin Long with Stephens, please go ahead.

Thanks and good morning. So, I wanted to ask about the secondary railcar market and what you're seeing out there. How has that market progressed in 2Q and I guess, quarter-to-date as well? And maybe you could speak about both the level of activity and what you're seeing in terms of competition on any deals that are out there today?

Well, I'll start let Eric jump in. So Justin, right now, the secondary market is still open. It's available. It's not as deep as it was last year, but the buyers are out there looking for some good deals and we're also out there and we could be out there as a buyer or seller, depending on what we see available and how good the deals are. Eric, I don't know if you'd add.

I think it's covered. Justin, we -- it's not, there's still deal. There is a few participants that would have been participating in the last couple of years, maybe on the sideline. But for the most part, the market is still there and you're able to get deals, transact either buying or selling.

Okay, great. And then on the lease rate trends, I was wondering if you could comment on how you've seen lease rates progress here over the last few months? And I know it's going to vary significantly by car type. But just from a high level, would love to understand how much of a pullback we've seen? And as you think about the market going forward with rail volumes getting a little bit better sequentially, do you think there's an opportunity for the lease rate environment to bottom at some point later this year or do you think it's going to take longer than that?

Okay, Justin, I'll start with that one. If you look at the lease fleet, we have seen the market get more aggressive there. If you're comparing us with the LPI that others talk about, we've not nearly seen the reduction in rates that they have but we are still seeing that headwind come in. When we look at what's going on with new cars going into our fleet, we typically have a higher lease rate there. So even though we're seeing some headwinds, it's not been significant for us overall, as far as when we would see them going backup, we would hope for it to be very soon but with COVID-19 we're really not sure what to expect on that. But you hit the right metric as car loadings continue to go up, we would expect to see the lease rates starting to rise.

And last question just quickly, Jean, it sounds like we're going to hear more about the strategic plan, after the third quarter, but I did want to ask just from a high level, if you could speak to your commitment to continue operating an integrated platform, is that something that still has the support of management in the board or is there any openness to evaluating your strategic alternatives on that front?

Okay. Sure, Justin, I'll talk to that. So, the board and management are aligned on the platform that we are operating in. We believe we can bring the best value to the Company and to our shareholders with our rail platform. Some of the benefits of that is the cost advantage railcar equipment sources, tax advantage, lease fleet investments, offsetting, manufacturing, taxable income, and then the lower relative admin costs. And then commercially, it gives us direct engagement for the customers over multiple touch points. We get actionable rail intelligence through this and valuable sales channels. So with all that said, our move forward is looking at the platform in total, but as always as a board and as a company, when new things arrive we'll take a look and see if we still have the right perspective or if we need to reevaluate.

We'll go next to Allison Poliniak with Wells Fargo.

I want to go first to the rail products possibility just go back to that question to make sure I understand it. And I guess two pieces to it. One, it does sound like you're hanging on to some incremental capacity based on sort of the order activity you're seeing in the market. I guess with that, could we assume maybe some level of increased pressure into Q3 depending on timing of those orders? And I guess how quick would the conversion rate be from orders to production? And the second part of that profitability question will be around COVID. I think you mentioned some costs that sound like they could be more one quarter in nature hopefully, assuming we're getting out of this. Was that impactful or I would say material to the quarter in terms of the headwind?

I'll start with the COVID and then move on Allison. So for the COVID-19, my estimates are between 4 million to 6 million impact in operations for the quarter and that was related to not only additional cleaning that we had to do, it was also related to employees that were high risk sheltering at home, or those that were exposed and had to shelter at home until we refer they were not affected by this. Do I think that will be as high in the future, if the COVID-19 positivity rate goes down, no, but it's really going to depend on what happens with COVID-19. We do have a lot of our management's time in the facility that ensuring people are following rules that are working safely and that takes a toll over time. So, we are hopeful that that will go down but can't say absolutely that it will. For the third and fourth quarter as far as the production, we will know, we think shortly, if those orders will close. And we would be able to convert and start producing those very quickly in the third quarter. So we are holding for a short amount of time, if they close, we'll start that operation. Like I said, have some tailwind for us. If they don't close, we'll take the appropriate actions and make the reactions out and then needed.

And then I just want to get back to the commentary around the orders trying to reconcile orders this sort of with a story that's out there. It sounds like there is clearly some verticals that are interesting which makes sense and then you certainly have a level of replacement needs over the year. I guess if we look at that storage number, and I know it's an elusive question in terms of what's normalized storage here. But it sounds like most of these are either storage in different meanings of vertical versus equipment that wasn't going to come back anyway, any color that you can provide around that?

So when you look at the 32% storage, I can't give you a lot of details, but there are two major markets that are driving that storage. And Eric, if you want to add more color?

So Allison, certainly the small cube covered hopper fleet related to the frac sand fleet is adding a lot of cars and storage, I'd say that 55,000 to 60,000 cars out of that total number. And then, you got open covered hoppers, coal cars, and there's still some tank cars in that number as well. When you look at the opportunities there out there; one, that number, you call the digital, it is elusive, you still get demand in those categories, because the markets not completely efficient. But as I mentioned, the replacement demand will still drive that is going to drive a lot of order activity in the next few quarters. And then there are still pockets of growth in the petrochemical space. We're still seeing growth there that you're going to have. So, there's not one railcar market, there's markets of railcars, and you're going to continue to see pockets of demand, even when the market numbers look like they're sitting there.

We'll go next to Bascome Majors with Susquehanna.

It's unusual to see an asset write down for operating lessor particularly near the year, but what's happened in the frac sand industry, with the spate of bankruptcy filings and distress and all that is also quite unusual year. I was hoping you could give us a little color on, after the write down of the covered half roughly, how much book value remains on the books for Trinity? And whether this assessment that you guys did on impaired or not impaired was specific to that fleet or if you also considered other pockets where there are such size as the stress just not as necessarily as acute here? Thank you.

Sure, Bascome. Yes, the impairment charge that we took is complicated about. I'll refer you to Page 5 and 14 of our press release to see how some of the mechanics go through, and how they flow through our financials. In terms of other car types, we're always monitoring our fleet for those situations. So, it's not just an annual thing that we're doing. We look at that all the time in terms of monitoring our fleet. You've mentioned some of the unusual changes and extraordinary changes that we had this quarter that really made us, that triggered that impairment around the bankruptcies and around our around our outlook that those cars were going to remain overbuilt. That industry has 125,000 small cube covered hoppers. As I mentioned earlier, I think 55,000 to 60,000 of them are underutilized, with our outlook for domestic drilling and specifically Wisconsin White Sand being used in the Permian. We don't think that's going to come back to the degree that it was. And so, we really looked at it and the change in the committed cash flows because of the bankruptcies triggered that impairment. And so, other car types, I believe that the credit profile of the rest of our portfolio is significantly better than the credit profile of our same customers. And therefore, those committed cash flows have a much higher likelihood to be converted to cash and that really -- looking at the impairment, we don't see it at this time anywhere else.

Thank you for that. And can you add, how much book value --

Yes, I'm sorry, and I think I mentioned it at about 3% -- after the write down, the book value of our small cube covered hopper fleet, which is not just our stand fleet, it's the whole -- it's our small cube covered hopper, which would cover other commodities is about 3% of the network value of our fleet at the end of the quarter.

And, I believe, we addressed this at least directionally last quarter, but could you remind everyone, who's trying to really assess the book value and what the pay for that? How much book value might be left in some of the larger tank cars exposed to crude oil and or the coal market? And that's all for me. Thank you.

So I'll refer you to our investor deck that has those breakouts. Now unfortunately, when you get into the crude oil that tank car goes across -- there, we don't necessarily have crude oil tank car. We have tank cars that carry crude along with other commodities, and those markets are able to move. For example, we just had a large deal where we converted our crude oil to other refined products that we just closed at the end of the quarter. That was all for existing railcars, but I would refer you to our investor deck. We will be updating that in the next, in the days to come as well, which will have the updated net book value, percentages in the breakout in all the different categories that they have.

Thank you for that. I'll refer back, and I know I said that was the last one. But Eric, I thought of one more while you were giving me that answer.

Yes.

You said in the slide deck, I know there'll be more disclosure on this in the 10-Q in itself, but you said you had 1.6 billion of unencumbered railcars, it looks like that went up 100 million and 150 million quarter-over-quarter but that happened with a $370 million write down and you guys adding $225 million in debt after quarter end. So how did the unpledged collateral go up? Can you help us unscramble that and whether or not that's performed or not for the debt you added after quarter end?

It does not include that we added after afterwards and we can get into all the mechanics of follow up, but effectively, the changes would be the adds to our fleet that were an opening and things that would have affected that in the quarter and then the small cars that we sold in the quarter. So those are the ins and outs and we'll be happy to walk you through it.

We'll go next to Barry Haimes with SAGE Asset Management.

I had a question related to the $350 million to $400 million investment in the lease fleet. Any feel for how much of that in effect is replacements? So keeping the fleet size constant, but you have certain cars that you need to scrap versus how much of it is actually increasing the fleet in terms of new units?

Thank you, Barry. So with the average age of our fleet of nine years, we don't have a lot of attrition in our fleet of 130,000 railcars. So really, when you think about our adds to our fleet, that'd be additive to our fleet, there's not much in the way of replacement. And when we talk about those numbers, that's net of any railcars that we have any assets we sell for the year and then also all on firm committed leases with customers. So, those are -- there's no speculative ads in those numbers as well.

Great, that makes sense, but just one follow-up, quick follow-up. Nine years is the average age, but if you look at what's the oldest tranche, how old are the relatively oldest cars on the lease fleet?

So without getting into handfuls of cars, really most of our lease fleet has been originated since 1979 when we started. And so, our oldest cars are, generally, there's still some of those that are in there. We don't have much in the way of I think it's about a half percent that's over 35 years of age, so it's a very small number. It's definitely skewed to the lower end of the range.

And there are no further questions at this time. I'll turn it back to Jessica for any closing remarks.

Thank you, Bree. That concludes today's conference call. The replay of today's call will be available after 1 o'clock Eastern Standard Time through midnight on July 30, 2020. The access number is (402) 220-6088. A replay of the webcast will also be available under the Events & 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.

And this does conclude today's program. We appreciate your participation and you may now disconnect.