Good day, everyone, and welcome to the Trinity Industries 2021 Fiscal Year-End and Fourth Quarter Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note today’s event is being recorded. 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 include statements as to estimates, expectations, intentions and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity’s Form 10-K and other SEC filings for a description of certain of the business issues and risks, a change in any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. I’d now like to turn the conference call over to Leigh Anne Mann, Vice President of Investor Relations. Ma’am, please go ahead.

Thank you, operator. Good morning, everyone. We appreciate you joining us for the company’s fourth quarter and full year 2021 financial results conference call. Our prepared remarks will include comments from Jean Savage, Trinity’s Chief Executive Officer and President; and Eric Marchetto, the company’s Chief Financial Officer. We will hold a Q&A session following the prepared remarks from our leaders. During the call today, we will reference slides highlighting key points of discussion as well as certain non-GAAP financial metrics. The reconciliations of the non-GAAP metrics to comparable GAAP measures are provided in the appendix of the supplemental slides. The supplemental materials are accessible on our IR website at www.trin.net. These slides can be found under the Events and Presentations portion of the website, along with the fourth quarter earnings conference call event link. A replay of today’s call will be available after 10:30 a.m. Eastern Time through midnight on February 24, 2022. The replay number is 877-344-7529 with an access code of 5826703. A replay of the webcast will also be available under the Events and Presentations page on our Investor Relations website. It is now my pleasure to turn the call over to Jean.

Thank you, Leigh Anne, and good morning, everyone. I hope 2022 is off to a safe and healthy start for all of you. We had a busy and successful end of the year, highlighted by the divestiture of our Highway Products business on December 31, and we are excited about the year ahead. Our optimization efforts continue despite the supply chain and labor headwinds across the industrial economy. And our commercial team actively pursued new opportunities for existing products and services while exploring ways to expand our offerings. We believe we are through the worst of the cycle with strong metrics to support growth in both our Rail Products and Railcar Leasing and Management segments. Furthermore, considering both the supportive industry environment and our internal business optimization work, our management team and Board firmly believe we enter 2022 poised for meaningful growth. We are entering the second year of our three-year plan we introduced at our Investor Day in late 2020, and we are on track to meet the goals we presented then. Needless to say, we’re excited to sustain this momentum into 2022 as we seek to accelerate our growth. The timing for this acceleration appears opportune. In short, we think 2022 is going to be a good year. Let me summarize some key themes from our fourth quarter and the full year. Please turn to Slide 3. We remain encouraged by the improving macro conditions that affect our business, and we expect the North American economy to continue its post-pandemic recovery in 2022. One of the unique aspects of this recovery has been the accelerated rate of inflation for both consumers and producers. Our business is resilient in an inflationary environment as we have the ability to re-price our lease assets and keep up with inflation. Inflation can…

Thank you, Jean, and good morning, everyone. Though the operating environment over the last two years has been challenging, we made significant progress at Trinity in 2021. We completed financing activity of approximately $1.6 billion, which conformed to our green financing framework and took advantage of historically low interest rates, lowering our aggregate borrowing costs by approximately 100 basis points. We launched a joint venture program with Wafra, targeting up to $1 billion in railcar lease investments. We divested our highway business, we raised our quarterly dividend, and we returned $895 million to our shareholders through repurchases and dividends. In short, we have made a lot of progress on our strategic initiatives and are poised to take advantage of the operating leverage of our business. Jean spoke about the market improvement. This is certainly evident in key industry metrics. Orders are up, backlog is up, scrapping remains strong. Lease rates are rising, and we anticipate easing of the headwinds coming from supply chain and labor disruptions in the quarters to come. These market metrics are positive. But I also want to reinforce my optimism about Trinity specifically being well positioned to capitalize on these market dynamics. With the fourth quarter sale of our Highway Products business and the work we have done to optimize our balance sheet, we are focused on optimizing returns in our business. I will begin on Slide 9 with a summary of the quarter. Starting with the income statement. Fourth quarter consolidated revenue from continued operations totaled $472 million. For the quarter, GAAP earnings per share were $0.16. Adjusted earnings per share of $0.08 declined sequentially due mainly to the gain from the Wafra sale in the third quarter, but improved from a negative $0.02 year-over-year. Full year adjusted earnings per share from continuing operations of…

Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Matt Elkott from Cowen. Please go ahead with your question.

Good morning. Thank you for taking my question. If I take the midpoint of your industry delivery guidance and assume the same market share as 2021, I’m coming up with about 13,600 cars. Jean, Eric, is that what you’re expecting for deliveries this year?

Well, let me start by saying, we expect the industry deliveries to be closer to the higher point of our range of 40,000 to 50,000. And I do want to bring up that, that number does not include our sustainable conversions. And we’re expecting for the industry that to be from 6,000 to 7,000 cars for this year. And then when you look at it, we’re expecting to be in the historical range of market share. Hopefully, that helps.

Yes. That’s very helpful. And then can you give us a bit more insight into where you expect the margin to go? I know the first half will be a bit lighter because of the low-priced cars, but how much differential from the first half to the second half? And where do you think the margin will shake out for the full year for manufacturing?

So you hit it very correctly. We’re going to be delivering the first half of some of the cars we took at the bottom of the market. And so we’d expect improvement in the second half. And I’m going to take you back to our Investor Day, where we’re expecting mid to high single digits. And I would expect us to be in that range.

Got it. So just one last follow-up, Jean. If the delivery outlook is better than that 13,600 I mentioned, given you’re at the higher end of the range for the industry, and then you have the other cars and a fairly healthy margin. I mean, the guidance does seem a little light. Is there something I’m missing here for the earnings guidance?

Sure. There’s still a number of headwinds and uncertainty in how the year will play out. We want to give you as much guidance as we can where we feel confident.

And Matt, let me just add, Matt. When you look at Slide 10 in our earnings deck, when you strip out the discontinued operations from the divestiture of the Highway business, the base – the Trinity business, the go-forward business was $0.34 in the – for 2021. If you just take the midpoint of our guidance range I mentioned on our script, that’s a 179% improvement year-over-year. And taking the volume, that just demonstrates the operating leverage of this business. And it’s not going to be smooth improvement, but we’re confident that we’re going to get improvement throughout the year.

Yes. No, that makes sense. I mean, I definitely – it’s only clear how much – how many of the consensus estimates include or exclude the Highway business. So it makes the comparison a bit tough. Eric, just one last question on the leasing side. Despite increases in fleet size and utilization, your lease revenue decreased quarter-over-quarter. So how much of this may have to do with the timing of the increases in utilization and fleet size? But that can’t explain it all. Did the management and services revenue decline?

Yes, Matt. I think I can help you. And so if you go – if you just go back throughout the year from the fourth quarter 2020 each quarter going forward, remember, in the first part of 2021, there were still a headwind in our lease rates. And those turned positive really in the third quarter. We talked about it late in the second quarter. The lease rates started to turn positive in terms of renewal activity. And so what you have in the fourth quarter is two or three quarters of decline in lease rates, offset by two quarters of improvement. And then you get into the timing of the fleet adds that we did. We made some secondary market purchase. Those were very back-end loaded in the fourth quarter. So that really did impact revenue to speak at all. In terms of the services, there’s a little bit of services revenue, but I would really – in terms of decline in the fourth quarter relative to the third quarter of last year. But I would really point to the changes in renewal rates and the timing of fleet additions. We had a large sale in the third quarter. And so that would have been a headwind to the revenue in the fourth quarter.

Got it. Thanks very much.

Thank you.

Our next question comes from Justin Long from Stephens. Please go ahead with your question.

Thanks and good morning. Just circling back to the question on margins. So looking at the first half, do you think margins for the Rail Products Group will take a step down sequentially versus the 3.3% that you just put up in the fourth quarter? And then second half, we’re getting to that mid to high single-digit range. I just wanted to make sure I was thinking about that the right way.

Well, first, Justin, we’re not going to give quarterly guidance. We’re trying to give you annual. We’re trying to help you out a little bit talking about the fact that we do have the orders taken at the bottom of the market still coming out in the first and second quarter. So I don’t know that we’re going to go a whole lot deeper than that except we said that at the end of the year, I’d expect this to be in the range that we gave you in Investor Day.

Okay. And then that comment at the end of the year, you’re saying by the time it’s kind of the exit rate will be in the mid to high single digits. Were you saying for the full year 2022, we’ll be in the mid to high single-digit range?

I’m saying that the exit rates will be in the mid to high single-digit range.

Got it. That’s helpful. And then I guess on railcar sales and gains on sale this year, anything you can share on what’s getting factored in? And then maybe we could talk about the share count as well and where you exited the year because I’m guessing you’ll see a pretty big step down here in the first quarter.

Yes. So the first part of your question in terms of the fleet sales, we are going to – we’re expecting more investment in the lease fleet. We talked about $450 million to $500 million – $550 million of net fleet investment. That’s after the car sales. The – compared to just around $90 million in the 2021. So that does – that means we’re signaling a lot more eliminations, certainly. In terms of the car sale activity, we plan on doing – continuing our Wafra transaction that we started in the third quarter last year. In my script, I talked about that is both the adds and the sales from the fleet will be throughout the year. So we’re expecting to be less lumpy, and so it will be through the year because it’s just – that’s part of what we do. In terms – so let me pause there. Does that answer what you needed on fleet additions?

That’s great. And I guess maybe just touching on the share count?

Yes. So when you look at the share count, a lot of the return of capital we did, we mentioned we did it on the last day of the year. So you had very little impact in our average share count in the fourth quarter. When you see our 10-K that we’ll file later today, you’ll see a share count of about 83 million shares, 83.7 million to be – 83.3 million to be exact. And so that’s kind of what we’re going into the year with.

Okay. And then you’re assuming that you execute on the rest of that repurchase authorization as well that’s in the guidance.

Yes. In that share count, you have the impact of the ASR, which has three quarters of that, and it was reflected in our 2021 results. And then you have about 73 million after we complete the ASR. And we talked about the ASR being completed, we expect it to be completed in the third quarter of this year.

Okay. Great. That’s helpful. I appreciate the time.

Yes, thank you.

Thank you.

Our next question comes from Allison Poliniak from Wells Fargo. Please go ahead with your question.

Hi, good morning. Just turning to – back to the supply chain and labor challenges, not unique to Trinity here. Is there a way to help us understand in terms of what you planned in Q4 that you weren’t able to execute because of those challenges essentially getting pushed in? And then the second part of that would be supply chain. I know Eric mentioned increasing working capital to kind of smooth some of that. But are you sort of – are you starting to circle outside of the existing supply chain or people that you’ve worked with to sort of firm up just given some of the challenges that are out there today? Just some any thoughts around that?

Sure. So when you look at it, for the deliveries at the end of the year that got pushed into this year, there were basically a couple of things that happened. We had a large order that needed to deliver in January, so the first of the year. So we had to build those and then hold them until January. We also had some hatch covers, that supply chain issue that was going on third quarter is still something we’re working through right now. That caused us to delay some delivery of some cars in the fourth quarter that will happen first quarter of this year. When we look at the overall supply chain on some of the items we were having problems with, hatch covers, valves, a few other things, we did decide to try to go a little bit longer on some of those to try to make sure we had those to not disrupt the line during the year. Not saying that everything is completely covered. It seems to be improving, but we’ll continue to work to stay ahead of that.

Got it. Helpful. And then the sustainable railcar conversions, I know that backlog of just over 1,000. Are we assuming those get delivered this year? Or is it a multi-year? I’m just trying to understand the cadence there.

Okay. So when I was talking about the industry number for this year, it was 6,000 to 7,000 that would get delivered this year.

And related to our backlog, those will be delivered this year, Allison.

They will. Okay. Perfect. And then just one last question. I know a lot of rationalization happened in this latest downturn geographically. As we think about us coming – with the industry coming back to replacement level, within your footprint, is there any, I would say, reopening of facilities that you need to do? Or could you manage the capacity influx with your current geographical footprint today in terms of manufacturing?

We’re confident we can handle the upturn to the replacement level with our current manufacturing space.

Perfect, thank you.

Thank you.

And our next question comes from Gordon Johnson from GLJ Research. Please go ahead with your question.

Hey, guys. Thanks for taking the question. I guess just a few, I guess, more macro questions for me. You guys talk about the trend first in car storage. I think the high we reached prior was 500,000. I didn’t hear you guys talk about kind of where we’re at right now and kind of how you expect that to trend? And then I have a follow-up.

Okay. So right now, there’s about 312,000 railcars in storage. About 81% of those are still active. So that leaves 19% that haven’t moved in the last year around. So the other ones are really just on the…

60. Last 60 days.

Sorry, last 60 days. That means the other ones are just in and out. They’ve got to do maintenance. They’re switching service. There’s other things going on with them. So the 19 – we’ve had 19 straight months of reduced storage of railcars.

I would just add that when you look at train speeds and some of the issues that the railroads have had, whether it’s weather, I think clearly, one of the things that’s happened as cars are coming out of storage to serve that – serve those – that demand, which isn’t ideal long-term. We’d like the rail system to be much more efficient. But in the near term, that is one of the things that’s making the supply tighter and also allowing lease rates to increase. And so I think the railroads, as they figure out some of their own supply chain constraints, we think the demand is there for railcar loads to kind of grow into the fleet.

Okay. That’s helpful. And there’s been a trucker shortage for the better part of the past decade. Yet I would argue that the railroads haven’t fully capitalized on that. Do you guys have plans to address that? And then lastly, I recently spoke to one of the bigger skeptics in the industry. And I was surprised to hear him say we’re in the best spot we’ve seen in the railcar industry over the past six years. But then he caveated that by saying he hopes that the industry doesn’t build more than 40,000 cars this year, adding to overbuild. And it seems like you guys are suggesting – I don’t know if 10,000 cars move the needle, but can you address those two questions? Thanks for the time.

Sure. And I’m going to start out with your second question. Just to say, over the past three years, approximately 150,000 cars have been scrapped, so taken out of the system. So when you look at that, some people put forward the scrapping because of the high scrap rates that they can get for those cars. That led for a need to get back in that range of 40,000 to 50,000 cars. And even if you look at the beginning of this year, it started at a pretty hefty pace. We think that’s going to start to slow down especially as Eric just mentioned, it’s getting a lot tighter out there to find the cars. So until there’s some replacements in the industry, they’re going to have to delay at least, we believe the second half delay some more of that scrapping. So we think it’s very reasonable to look at the next few years, two or three years, being in that 40,000 to 50,000 range. And at least that’s our look at what’s going to happen. We don’t see a super cycle coming in.

And Gordon, let me just add to that. We are a large manufacturer. We have a large lease fleet. I believe we have very good visibility in the commercial activity in the North American market. We don’t see a lot of speculative order. And when we look at our lease fleet, the returns to add something to our fleet to book space, it’s got to meet returns. And we have a big residual position. And so I think there’s – I think I would expect to see more discipline in this market this cycle than what we’ve seen in the past just because of where we are. There’s not – there’s demand that matches what we’re building.

And we’ll go back to your first question. And we stated in the prepared remarks that we want to be part of the solution to solving the inefficiencies that are currently going on in the rail system. One way that we’re looking at doing that is RailPulse. I know you’ve heard about that. But if you can get a way for the shippers to have more visibility of where their cars are to allow them to control their supply chain better, I think you’re going to see much more of the traffic or carloads moved to railcar instead of off the highway. But that’s just one way that we’re trying to work within the system to make the whole industry better. This is not just something for Trinity. It’s an industry effort.

Thanks again for the questions.

Thank you.

And our next question comes from Bascome Majors from Susquehanna. Please go ahead with your question.

Yes. good morning. You’ve triangulated some of your standing long-term outlooks with your view this year already on – with industry deliveries and manufacturing margins. I was hoping if you look a little bit about the net portfolio lease investment. I believe you had said $500 million to $600 million over three years. And this year plus what you did last, that gets you well within that range. And I’m just curious if there’s maybe some conservatism in modeling sales before you have that deal inked or if you think that investment is just going to rise above that range? Just anything you could share to help us calibrate that over this year and next would be helpful. Thanks.

Hey Bascome, this is Eric. A very good question. You’re right in your assumptions that when you take our guidance and what we did last year that would get us basically a three-year plan. And there is a lot of activity still to happen. And so I’d say a lot of it is timing. I don’t think our outlook over a three-year plan has changed. With the Wafra transaction, we plan on selling about $1 billion of railcars over the three-year period. We are projecting based on our – our projections include assumptions about what will be leased and what will be direct sale. And the timing of when those adds are, you can’t just add a car and lease and sell it the same day. And so I think when you think about over the three-year period, I would say that I’m still comfortable with our three-year guide, and it gets in the timing. I am encouraged on lease pricing, and the lease pricing has improved. And that – as we look at our capital allocation framework, investing in leasing is much more attractive than it was last year, for example. And so that’s a good problem to have, and it’s something that we’ll continue to evaluate. If we change our outlook on that, we’ll let you know.

I mean, to triangulate that, just want to follow-up because on Justin’s comment earlier, I believe you talked a little bit about having a steadier sort of gains on sale and both investment and dispersion cadence as far as the lease fleet goes. But those comments there suggest there might be some lumpiness in year-to-year and kind of getting to that net $500 million to $600 million over a year. Can you just consolidate those two and just make sure that we’re hearing the consistent message here? Thank you.

Yes. I think as there will be timing of when you add a railcar to our fleet and when we might sell it out of the fleet. And so it’s hard to model a railcar sale when you don’t have a railcar order especially as part of a syndication plan. And so – and you do have to make sure everything delivers and everything like that. So I do think when you triangulate, as you said, all of our assumptions against a one-year assumption, you are going to have some lumpiness year-to-year in terms of those three-year assumptions. I do think that our adds and our sales will be much smoother this year than they were last year. Last year, we did basically most of it in the third quarter here. When you compare it to 2021, we would expect 2022 to be smoother. It won’t be – it’s not going to be straight line by any stretch, but it should be smoother.

All right. Thank you for that. And lastly, you talked a little bit about the operating margin on an exit rate back within the range that you had guided. I believe it was mid to high-single digits. Do you feel better or worse about where this thing is going as far as the manufacturing cycle and margins on that "mid-cycle" whether that’s 2023 or beyond? Or just curious versus six, 12 months ago, how you feel about where the cycle is heading today. Thank you.

Thanks. I’ll take that one. So we feel much better about where the cycle is heading versus the last couple of years. We just hit the bottom. We inflected and started seeing orders third quarter of last year, so definitely a different field. We did a lot of heavy lifting during that first 1.5 years to where we were going through and closing some facilities, making sure that we rightsized everything in those facilities. We moved supply chain. All of them, we put in some automation, some new technology, all of that cost us some money to get that done. We were doing that at the bottom of the cycle. Now what we’re looking forward to as the cycle starts to recover, we should see the benefits from that. And that’s why we’re saying as the volume comes up, it’s going to be better for us and especially if it stabilizes. Hopefully, that helps.

All right. And last one, I won’t ask for numbers you can’t guide. I understand you’re still anchored to your three-year outlook, and there’s not an EPS number in it. But what needs to happen to get to a point where you’d like to kind of update that a little more crisply about where this is heading in year three? Is that really a Jan, Feb 2023 event? Or is there a point where you get through some things you’d like to see happen this year where maybe an Investor Day-type meeting and a little more visibility on year three might be appropriate? Thank you.

Well, thanks for clarifying that. We would expect as we get closer to the third year that we would start updating some of our assumptions and be able to tell you what we think is going to happen, where we’re at overall and completing the three-year plan but starting to talk about the next few years in that cycle. So look for that coming, and your timing sounded about right. Thank you.

All right. Thank you.

And our final question today comes from Steve Barger from KeyBanc Capital Markets. Please go ahead with your question.

Good morning, everyone.

Good morning.

Based on customer conversations, do you expect that conversion activity accelerates? Or realistically, do you think you deliver more than the 1,150 this year?

So I think it’s going to be accelerating. There’s a lot more appetite for it now as people are starting to see those go out, start running and see the utility of doing that. So it helps in the utilization of what you have, and it also helps overall with some of the rates.

And with the contribution from conversions growing, can you talk about how we should think about revenue and margin contribution from that?

So actually, it’s pretty consistent with the new products. Remember, this is really a freight car-driven market, but margins overall for the conversions are very similar to what you would expect to see on new car.

And should we think the revenue is half of an average new car, 70%?

It varies depending on what’s going to happen. If it’s a heavy modification, it’s about half, half to 70%. Yes.

And as you think about the margin profile you’ve talked about in net fleet additions, how are you thinking about working cap this year? And more broadly, just what do you expect for operating cash flow in 2022?

Yes, Steve. So as I mentioned, we did see working capital build in the fourth quarter, and I would expect it will continue to build this year as our production rates increase. And so there’s – we did not provide guidance on operating cash flow. Obviously, when you look at 2021, we are aided by significant tax refunds that is behind us. So you will not have that. So it’s really going to be more of a traditional operating cash flow, which this business will produce significant operating cash. And so – but there will be a headwind in terms of working capital and what we produce in operating cash flow.

Right. So those two things will reverse. You don’t have the tax benefit and then you’ll have a working cap build as you go through the year relative to 2021?

Exactly. Right.

And sorry if I missed this, do you expect the delivery cadence is equally spread across the quarters for whatever the number is that you deliver?

No. As we look at through the year, I would expect to see it grow quarter-over-quarter.

Okay. And then just last one for me. Earnings have been pretty constrained over the past four years. The 2022 guide came in below consensus. And we – since 2017, we’ve seen a really significant reduction in shares outstanding. Do you think if 2023 deliveries are up again and lease rates continue to improve that earnings can start to look more like 2017 again? Or just, I guess, how are you thinking about the progression? Because it just feels like that this has been – obviously, industry conditions have been tough, but this has been a very slow kind of ramp in recovery.

Real quick, I’ll start and let Eric go ahead and add. But when you look at it, we knowingly in 2020 during the pandemic and follow off of orders made the choice to go ahead and make some radical changes within the company to set it up for the recovery. Even though those actions continue, the majority finished 2020 and 2021, which would hamper the EPS. If the market continues to recover, we finish all of the initiatives that we have, which we do intend on doing, I think it will get you into our range. And then we’ll start talking about once that’s done what you should expect on an ongoing basis from the EPS. But remember, the purpose of doing all that work in 2020 and 2021 was to help us on the next down cycle. So we wanted to ensure that manufacturing did not take away during the bottom of a normal cycle and then was accretive as the cycle went up. And the dynamics are just starting to happen on that. So this year, you’re going to finally see volumes start to go up. Again, we’re predicting volumes to at least stay between the 40 and 50 the next couple of years after that. So I think you’ll see how our platform performs much better in that type of environment.

And Steve, I just – I would add. I think your underlying – I’m not going to comment on what – how it compares to 2017, but your underlying thesis, I think, is correct in that this business has a lot of operating leverage. And post Highway divestiture, the business is much simpler in terms of it is a pure rail business, railcar manufacturer, railcar leasing, railcar maintenance services. And we do have a lot of operating leverage in the business. I think when you go back over the last few years, I think since spin, our share count is down significantly, probably 40 million, 45 million, 50 million shares that it’s gone down. And so I think our – once the earnings start, you are going to see more leverage in terms of the earnings per share. Just the math says it will be.

Yes. Be good to see. Thanks.

Thank you.

And ladies and gentlemen, at this time, we’ll conclude today’s question-and-answer session. I’d like to turn the floor back over to Jean Savage for any closing remarks.

Well, thank you for joining us this morning. We’re now in the second year of the three-year strategic plan and are on track to meet the goals presented at our Analyst Day in late 2020. 2021 was a year of optimization at Trinity, optimization of our balance sheet, our lease fleet and our overall enterprise. We are confident that our execution to date and through the remaining strategic plan position Trinity to drive significant growth in the years ahead especially in an improving railcar market. So thank you, again, and we look forward to updating you on our progress on our next conference call.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today’s presentation. You may now disconnect your lines.