00:04 Good morning, everyone, and welcome to the Trinity Industries' First Quarter Results Conference Call. All participants are currently in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please also note, today’s event is being recorded. 00:35 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, 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. 01:15 At this time, I'd like to hand the call over to Leigh Anne Mann, Vice President of Investor Relations. Ma'am, please go ahead.

01:25 Thank you, operator. Good morning, everyone. We appreciate you joining us for the company's first quarter 2022 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. 01:45 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 metrics are provided in the appendix of the supplemental slides, which are accessible on our Investor Relations website at www.trin.net. These slides can be found under the Events and Presentations portion of the website, along with the first quarter earnings conference call event link. 02:11 A replay of today's call will be available after 10:30 a.m. Eastern Time through midnight on May 4, 2022. The replay number is (877) 344-7529 with an access code of 7333684. A replay of the webcast will also be available under the Events and Presentations page on our Investor Relations website. 02:33 It is now my pleasure to turn the call over to Jean.

02:37 Thank you, Leigh Anne. Good morning, everyone. Before we get started today, I want to point out that both our 2021 annual report and our interim CSR update report are available on our website. I'm especially proud that our CSR report provides a summary of our first formal materiality assessment, the results of which are driving our ESG strategy forward with a priority focus on employee health and safety, diversity, equity and inclusion, human rights, energy consumption and reduction of greenhouse gas emissions. 03:17 I'll start my comments on slide three. As we have seen some of the pandemic concerns and restrictions easing, it was nice to be back in person and participate in industry events again in the first quarter. We continue to see strengthening market tailwinds, as we discussed on our last call. However, new headwinds appear to be developing, including persistent inflation, increasing interest rates and the ripple effects of the war in Ukraine. Particularly in the U.S., challenges persist in certain labor markets and supply chains as well. I want to stress the optimism I have about the second half of this year. 04:00 While we will address some of the headwinds we saw in the first quarter, we continue to expect leasing margins to improve with rising rates and increased utilization of the fleet driven by strong railcar demand. Also, our rail manufacturing backlog is extremely strong, and we'll start delivering railcars in conversions that were sold in more favorable market conditions as the year progresses. 04:28 Our book-to-bill in the quarter was over two times. Our future lease rate difference will improve to 2.4% and has now been positive for three quarters. And our fleet utilization continues to improve and is back to pre-pandemic levels at 96.5%. Although we will continue to face…

14:22 Thank you, Jean, and good morning, everyone. There are a few things I wanted to point out before talking about the quarter's results. First, in 2020, we introduced the future lease rate differential, or FLRD. This metric calculates the implied change in revenue for railcar leases expiring over the next four quarters, assuming they were renewed at the current transacted lease rate for each railcar type. 14:53 We have refined the way we aggregate the data to better correlate with actual revenues, and have adjusted the FLRD to account for this change in prior periods, as you will see on the trend line on slide four. The goal of this metric is the same, and we view it as a good indicator of the direction of our future leasing revenue. 15:18 As we've previously announced, we priced a $245 million asset-backed securitization that is expected to close tomorrow. The debt is backed by a discrete pool of railcar assets, the TLC will continue to own and manage. This financing is critical to our ongoing balance sheet management as majority of the railcars that will serve as collateral for this debt will come from our warehouse facility, freeing up more availability. 15:49 At an interest rate of 4.55%, it is clear that we are in a different financing environment than last year. But we are very pleased with investor interest in our securitization program. As we move forward, we will evaluate the most attractive financing structures for our capital needs. 16:12 Now please turn to slide eight with highlights from our financial statements, starting with the income statement. Total revenues of $473 million in the quarter were relatively flat sequentially and up significantly from the first quarter 2021. The year-over-year increase is driven by increased Rail Product deliveries. 16:35 Our…

22:32 Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] Our first question today comes from Bascome Majors from Susquehanna.

23:08 Hi, good morning. And thanks for taking my questions. I wanted to go back. I mean, I know you have the three-year plan out there. But gosh, a lot of things have changed and some of them quite positive for your business, others may be more mix since November of 2020. I was hoping we could maybe high level go through some of those factors that have shifted and talk about how they affect your business. Starting maybe with interest rates, I know you alluded to 75% of your debt being fixed now, but just how you feel about the funding of the fleet? And what a sustained higher rate environment changes on your leasing strategy if it changes it at all?

23:51 Sure. Bascome, this is Eric. Yes, good question. And I did comment in our prepared remarks about our debt profile. And we're very pleased with the mix of debt we have. We just -- as I mentioned, we just -- we're closing on another financing tomorrow when with access the ABS market. And clearly, interest rates are elevated from where they were over the last couple of years. But we have a very nice maturity profile, very little in the way of maturities in the next couple of years. Most of our leasing debt is fixed rate. 24:29 But the interest rate environment -- increase in interest rate environment will have an impact. It mainly has an impact on new railcar leases. And that's where you really notice the funding cost is on those investment decisions when you're acquiring railcars, whether you're acquiring them in the new assets or if you're acquiring railcars in the secondary market. That's really where that interest rate comes into play. And the result of higher interest rates is it's going to make investors hurdle rates higher, which should make lease rates higher. And that gets back into the existing fleet. And we expect and we're seeing from our FLRD that lease rates are going higher. That's one of the factors that allow that to go higher once you have periods of balance, which we do have more -- the industry fleet is more in balance today. So it is a change -- but I think overall with the existing fleet, it is more of a benefit than a harm.

25:36 All right. So short term, since you have fixed so much of your portfolio in the last three or four years, you think that inflation helps you more on revenue than it hurts you on funding?

25:47 I do. You're going to reprice the fleet over -- if we have a three-year remaining lease term, which we do on average. So we're going to reprice a significant amount of fleet during the period of that fixed debt piece. So I mean it does get into timing, but overall, I think it's a benefit. And -- go ahead.

26:11 No, go ahead. I’m sorry.

26:15 These are long-term assets. And so, these are 30, 40 year assets, and part of leasing business is, you finance it and then you pay down the debt and you refinance it. And every time you refinance it, those are liquidity events. And so, it just speaks to the cash flow generation of the lease fleet. And even in periods with higher interest rates, I would expect we'll still generate significant amounts of cash flow from it over time.

26:46 And I'll ask one more on kind of a similar angle. I mean, certainly, steel prices and new asset costs have been dramatically more inflationary than I'm assuming you underwrote in that plan in November of 2020. I'm a little surprised the -- I think the annual guide for net lease fleet investment of what, $450 million, $500 million is roughly in line with what you had planned over three years in that period. Can you talk a little bit about the math between monetizing assets in a very high new car price environment versus investing in the future of your lease fleet? And then how that balance has changed or can change in this environment versus how you planned a couple of years ago?

27:36 Another really insightful question, and you're right on all the fronts. So things have changed. But the one thing that has not changed is our capital allocation framework, and we've committed to -- we talked about modest lease fleet investment over that three-year period. We're still looking at modest fleet investment over that period. But things have changed. And there's more demand for -- when we put out our Q today, there's more demand for railcars currently. That includes more demand for lease product as well, as our backlog for both has grown. 28:19 And so -- and when you look at that net fleet investment that you cited in the $450 million to $550 million, just keep in mind, that is a net number which includes both additions out of our manufacturing sites of new lease fleet additions. It also includes secondary market -- any secondary market activity that we do. And then it's net of railcar sales. Our platform has an opportunity to create value with all of those inputs in our net fleet investment. 28:52 I think what it comes down to is timing. We have seen more demand for leases. We're seeing opportunities in the secondary market. We're also seeing more demand for our rail lease products through sales, whether it's through our RIV platform or whether it's through the secondary market. All that gets in the timing. You cannot transact until you have the content. And so, I think when you look at it over a single year, it can get a little lumpy. When you get to it over three years, nothing has changed in our framework and what we're going to do. That's a really long answer, but there's a lot of inputs and a lot of puts and takes. But I'll stop there and see if you have any questions.

29:38 Thank you.

29:42 Our next question comes from Matt Elkott from Cowen. Please go ahead with your question.

29:48 Thank you. Good morning guys. I know the inquiry activity is still strong and the translation into orders clearly picked up in the last two quarters as steel prices began to ease. But has the translation to orders subsided again following the conflict in Europe, which drove steel prices back up?

30:13 Good morning Matt, this is Jean. We're actually still seeing strong conversion. And so, the impact of inflation, the impacts of steel prices going back up after we sell them come down have really not changed that pattern yet. As we look at it, the car owners are making long-term decisions on what they're going to put into their fleet. And so, some of the short-term headwinds that we're seeing have not slowed anything down yet.

30:47 Got it. So the quarter-to-date order number is satisfying for you guys so far?

30:57 If you're talking about the second quarter, yes, I would say we're still happy with what we're seeing.

31:03 Got it. And Jean, do you think -- when do you think we'll start seeing some of the largest lessors pull the trigger on placing orders? I mean, do you think that they're going to keep holding off until they see what steel prices will do? Or do you think that some of them are reaching a point where they need to add to their fleet, otherwise they'd be jeopardizing customer relations and sacrificing scale?

31:34 So when we're looking overall at what's going on, it's pretty well distributed. We talked in the past about when you have a recovery railroads and third-party lessors are the first to the table. And then the end shippers come in, and we're seeing orders come in from all three of those areas. So I would say we're already getting the activity. And remember, though, on this cycle, we're projecting 40,000 to 50,000 railcars minus sustainable conversions or without the sustainable conversion. And that's really replacement level. So there's no big driver to do anything different than replace the fleets that have been scrapped over the last three years, and are continuing to get scrapped now.

32:24 Okay. And then you mentioned the 40,000 to 50,000, which you guys had kept unchanged. Would you guys be willing to share any thoughts on where you think deliveries for the industry could go in 2023?

32:40 So again, we think orders are going to be the 40,000 to 50,000, and we would expect to see similar deliveries to what you're seeing this year.

32:50 Got it. And then just one last quick question for me, which I asked to one of your competitors three weeks ago. This cycle is driven by more than one or two railcars, which is typically the case. It's more -- a lot more broad-based. So I was wondering what the margin implications might be for a cycle that involves having to do more line changeover than you have done in the past? I mean, the mid to high single-digit margin you expect to finish the year at, is that pretty much where you could hope to be in 2023? Or is there more upside to that given the mix of cars that are in high demand?

33:37 Well, as you look at this year, we started at a lower run rate. We said we'll double that by the end of the year. We're expecting next year to come in still with that double rate. So what we're ending this year, which helps you overall as far as efficiencies. So I would say there's potential upside for next year on those margins, but we still are taking orders for 2023. It's nice to already be getting orders this early in the year for next year, but we'll have to see where that lines up, and I would expect to see some possible improvement on that.

34:16 Thank you, Jean. Appreciate it.

34:17 Thank you.

34:20 Our next question comes from Gordon Johnson from GLJ Research.

34:27 Hi, good morning guys. Thanks for taking my questions. This is James Bardowski in for Gordon. Just had a question, first on your Rail Group margins. Clearly, you had some railcars that you were selling that you booked in the bottom of the cycle last year, which aided to the margin pressure. Now for the -- as we progress later in the year, how are you expecting cost pressures to evolve? I guess insofar as the improvement for your Rail Group margins, how much do you expect to come from higher value cars versus easing of cost pressures?

35:14 So this is Jean. I'll go ahead and take that, James. So when you look at the rail products for the second half of the year. First, we have definitely been taking the orders in the environment we're in now, which is a tighter market. So we're seeing better pricing that we're getting there, better margins that would come along with that. And that's no small piece. I'm not going to give you the exact percentage, but that is very helpful. 35:42 The other thing you've got to look at is, we had high impacts, at least in January from the Omicron variant. Some of our facilities had up to 30% absenteeism during that time period. We've seen that abate as we've gone through the first quarter. The other thing I'll say is first quarter, there were some more supply chain issues, especially in some of the specialty items, hatches, valves, covers that we had to get that we've been working to abate by the second half of the year. Some of that working capital that we're putting into the inventory will help us limit the number of changeovers we were doing due to not having components to finish cars. That's really disruptful during a run if you have to pull cars out, so you can weigh on materials to come in. 36:39 So there's a combination of having better labor availability, having better supply chain and also having better dynamics around the orders that we're getting.

36:52 Okay. That's very helpful. It also helps explain your inventory build. For the -- in terms of orders, and I think you might have mentioned this on the -- in your prepared remarks, I apologize if I missed it. But where are you seeing some of the pickup in activity, which sectors?

37:15 So it is pretty wide-based. As we look at where orders are coming from right now, it's not in a single area. But if you look at the top areas of boxcars, definitely there's been a lot that has been scrapped over the last few years, they were getting older and they are being replaced, grain cars remain strong and plastics would be some of the top three areas.

37:42 Plastics. Okay. Great. And then I'll just squeeze in another quick one, please. For your new orders that, in my opinion, I think it looks pretty good compared to last year, particularly and especially in the average value that you guys reported. So you mentioned the boxcars and plastics were some of the higher demand items. But how broad are your customers? Are these pickup in orders coming from just a few customers? Or are you seeing more and more of a source? !!!

38:16 It’s pretty broad based and across all the different areas that we are seeing those customers come in, which we mentioned little bit earlier in the discussion and the questions was the fact that it typically with railroads and third party lessor, and it’s moved into shippers also buying more cars. So it’s great to see it progress up as we look at the different areas. The shippers were seeing a lot more attrition, we got an eco-box or inflated boxcar that is taking new product design from us that’s getting some more momentum.

38:55 Okay. Very helpful. And I'm sorry, this is actually the last one. In terms of your downstream shipments to the leasing, is there any indication that you guys have given as far as how many cars you'll be selling in-house?

39:11 So James, this is Eric. When we put out our Q, we will show -- we break out the backlog between how much of our delivery is in there and what our leasing backlog is. Our leasing backlog has grown. It's just under $700 million of our backlog, which is up dramatically from the same time last year. And you'll see that all in the Q, which will get filed this afternoon.

39:39All right. Good. I know what I’ll be doing this evening. Thank you, Jean and Eric. Thank you so much.

39:44 Thanks, Eric.

39:47 Our next question comes from Steve Barger from KeyBanc Capital Markets. Please go ahead with your question.

39:55 Hi. Good morning, guys. It's Ken Newman on for Steve.

39:59 I’m sorry. What’s your name?

40:02 It's Ken Newman on for Steve. So I appreciate the color on expectations for rail segment margins to for the first half. But I'm curious if you could just help us think about the sequential improvement in margins for second quarter versus the first quarter. Should we expect margins will kind of be in that low to mid-single-digit range? Or should we expect that it's similar to the first quarter level?

40:31 So Ken, unfortunately, we're not giving quarterly guidance. We typically just give annual guidance. We're trying to help you roll-out a little bit talking about first half versus second half. And in my prepared remarks I talked about a step change in the margins for the second half of the year, and that's really as far as we'll go on that.

40:56 Okay. So maybe just asking it in a different way then. I know you talked about full year margins kind of being in that, call it, mid to high single-digit asset range? Is it fair to assume that the segment margins in the second half will be below that top end here? Just trying to think about the magnitude of that stuff change from first half to second half.

41:18 One thing I will tell you is, we've mentioned that in the first half of the year, we will be delivering the orders of the cars that were taken at the bottom of the market. And so, until we work through those, I don't see a step change. Once you get to the orders that we're taking now, that we'll deliver in the second half of the year, I think you'll see, again, a marked or a step change in what those margins will be.

41:50 Understood. For my follow-up, it seems like service levels from the Class I have obviously taken a hit amid the current supply chain environment. Just to clarify on the inquiry comments that you made earlier, are you seeing any of these new inquiries for 2023 talking about demand beyond replacement activity? Or is it still primarily replacement at this point?

42:14 There are certain markets that are seeing some growth. But overall, it's still replacement type demand that we're seeing. And remember that, as these shippers or car owners make their fleet plans, they're looking for the long term, not just for that short-term impact that you're seeing from the railroads, because they're still looking at either opening new plants, some of the replacement or growth opportunities they might see.

42:44 Understood. One last one, if I might. I'm just curious if you could talk a little bit about the large impact from the supply chain at this point. Obviously, we know that deal has been a big impact. Anything that we should kind of be aware of as we think about some of these escalations in inflation or other supply chain side as we think about the cadence from 1Q to the second quarter?

43:08 The biggest thing that we still see lingering on the supply chain is, at least in the US, labor shortages still are causing them to delay some of their shipments, not get them tools in the time different than we expect. We are trying to mitigate majority of that that we can by that inventory build that we've talked about to try to smooth the impacts on our facilities. We still think we'll see some of those impacts through the first half of the year, and expect to see that getting better in the second half.

43:46 Understood. Thank you.

43:47 Thanks, Ken.

43:48 Thanks

43:50 And our next question comes from George Sellers from Stephens Inc. Please go ahead with your question.

43:57 Hi, good morning. It's been kind of a hectic morning so, sorry, if I missed this, but could you all talk about the sequential progression in lease rates that you saw in the first quarter? And maybe quarter-to-date as well for both freight cars and tank cars?

44:16 Sure. So when you look at our FLRD, it's 2.4% is what we're reporting for the first quarter. It's the third quarter in a row that we've seen a positive FLRD. And as you look at a tightening market that we still see out there for railcars, railcars and storage going down, scrapping continues. Railroads being a little bit slower as far as our speed, all are contributing for that demand. As long as we continue to see that demand, I would expect to see I'll be able to adjust or increase that lease rate and keep up with some of the inflation that we are seeing.

45:03 Okay. Got it. That's helpful. And then, sort of thinking about some of the impacts that the Russia and Ukraine conflict have had on the energy markets, have you all seen some of those customers reenter the market or some increased activity in coal and frac sand markets? And how should we think about that from both a lease perspective, leasing cars, and then also potentially some new railcar orders?

45:34 I'll start, and then I'll let Eric jump in here. So first, our thoughts and prayers go out to the people in Ukraine with a war that they're going through. And we don't see any positives coming from that. It's a terrible situation to be dealing with. And I think overall, it's going to be minimum impact to the cars and the orders that we're seeing here in the US. But Eric, I don't know if you'd add.

46:02 Yeah. I don’t -- I wouldn't put the drivers on the war. But you asked about small cube covered hoppers. We are seeing increased drilling activity that started really last year, and we're starting to see that fleet get tighter. It's not tight, but it's certainly tighter. And just any movements in terms of the crude oil side, most of that is going to move by pipeline. We don't see that as a big rail move. Where we are seeing growth in the liquid side is more on the biofuels, and greater demand for biofuels, and that is helping the tank car fleet and getting that tighter. So just clarifying a little bit of that.

46:50 Okay. That's helpful as well. And then I have one last one more, more longer term. Going back to your Investor Day in 2020, you highlighted some new products with potential operating income impact of $150 million to $200 million. How much of that has been realized at this point? And how do you expect some of those products to progress this year and maybe next year as well?

47:20 Well, it was multiple years. So it takes a little time to do the design and get the cars out running and pick up. But I'm going to point to a few things. Our new grain car covered hopper has gone extremely well, and that's a [54, 59] (ph) many of the railroads have picked up on that car throughout North America and not just in the US, and has done well for us. Our boxcar work is also picking up, and that's insulated boxcars, refrigerated and some of the standards. So making moves on all of those. 47:57 The autorack redesign we did, it's an hourglass autorack. It's meant for the large vehicles and it allows more space on the interior design for people to get in and out as they're loading and unloading those cars. We're starting to see autorack demand pick back up. And I think you'll see that escalate as the chip shortage is overcome, and you can get those automobiles out and running. We haven't really said how much of the dollar amount will be done for this year, but we are making progress. We're seeing that go up. And we still have confidence that we'll hit a big chunk of that number.

48:43 Okay. Thank you, I'll leave it there. Thank you both for the time.

48:48 Thank you.

48:50 And ladies and gentlemen, with that, we will be ending today's question-and-answer session. I'd like to turn the floor back over to Jean Savage for any closing remarks.

49:00 Well, thank you, and thanks everyone, for joining us this morning. The excitement of the second half of the year is high. As we've shared with you today, we look around our business and see improving metrics and data that forecast higher returns and earnings later in the year. We look forward to seeing our hard work pay off, and reporting those positive results with you. Thank you for your support of Trinity, and please reach out to Leigh Anne with any further questions.

49:31 And ladies and gentlemen, with that we'll be concluding today's presentation. We do thank you for joining. You may now disconnect your lines.