Trinity Industries, Inc. (TRN) Q3 2022 Earnings Report, Transcript and Summary

Good day and welcome to the Trinity Industries Third Quarter Results Conference Call. All participants will be in listen-only mode today. [Operator Instructions] Please note this event is being recorded today. 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 would now like to turn the conference over to Leigh Anne Mann Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. We appreciate you joining us for the company's third 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. 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, 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 third 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 November 1, 2022. Replay information is available under the Events & 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. When we last spoke in July, I told you that we were expecting significant acceleration in the back half of the year in terms of railcar production, lease fleet growth and better financial results. I am pleased to report today that we are on the path we laid out for you, and we continue to see momentum in the markets we serve. While there is a lot of uncertainty in the economy, we believe our business and the industry are resilient to a minor recession. They are underpinned by the significant improvement in the balance of supply and demand of railcars over the past two years. In short, our view of our business is relatively unchanged in the last quarter. Turn with me to Slide 3 to talk about our key messages from today's call, all of which we will expand on later in our prepared remarks. First, we are reporting GAAP EPS of $0.35 and an adjusted EPS from continuing operations for the third quarter of $0.34, which is up $0.20 from last quarter and up $0.16 year-over-year. You'll see in our remarks today that our results show strength across our businesses as higher external deliveries and gains from another successful Wafra transaction bolstered our results. Second, our Future Lease Rate Differential or FLRD was a positive 11% this quarter, which we believe is evidence that the market will continue to support solid increases and renewing lease rates. This is due to a higher fleet utilization in the quarter, 97.9% for our lease fleet, showing that demand remains high and available supply remains limited. Third, this quarter we completed a sale of 2,678 railcars to our joint venture with Wafra as part of our previously announced rail investment vehicle program. This sale generated proceeds of $254 million and we recorded a gain of $25 million in our leasing business. In addition to the Wafra car sale, we sold several other small portfolios in the quarter for total proceeds of $300 million and a gain of $34 million. And finally, earlier this month, we announced a six-year 15,000 railcar order, which drove our reportable third quarter backlog up to an impressive $4.1 billion and our book-to-bill ratio for the quarter was five times. This order increased our backlog by $1.8 billion. Again, each of these sales and orders is a reflection of the visibility we see in demand relative to supply for our industry. We are encouraged to see many of our customers continue to make long-term investment decisions. And now, let's turn to slide four for a market update. While rail traffic is still impacted by labor shortages and service issues, we are starting to see some easing. Rail traffic is still below pre-pandemic levels, but we continue to see improvements in railroad headcounts and believe this is a needed step to support better rail service. There is no quick solution, but we are in full support of increased efficiency and service in the rail industry. After 23 months of declines in railcars and storage, the storage number ticked up slightly over the summer, largely driven by seasonal grain cars going back into storage before the fall harvest and tank cars in storage to make preparations for the winter heating season. However, that trend reversed in October when the AAR reported 16.9% of inactive cars as compared to almost 21% a year ago. This is the lowest percentage of inactive cars in October since 2018 and the lowest absolute number of idle railcars since 2015. Moving to the Trinity's specific data on the bottom half of the slide. As I mentioned at the top of the call our FLRD and fleet utilization are once again favorable in the quarter and we believe will drive up leasing revenues in coming quarters. Our FLRD is down slightly from last quarter, but this is more of a function of the mix of cars expiring as opposed to a decline in remarketing rate. The strength we are seeing in lease rates is broad-based. We delivered 3,935 railcars in the quarter, a 57% increase over the second quarter despite continued challenges with railroad service and supply chain disruption. Last quarter, we stated we plan to approximately double deliveries in the second half of the year as compared to the first half of the year. Our pace of production has continued to accelerate and we still have line of sight to achieve this target in 2022. Moving to orders. In addition to the 15,000 railcar multi-year order with GATX, we received orders for an additional 4,500 railcars in the third quarter, demonstrating the continued momentum of the market. We believe the market demand is driven by attrition of aging assets and so we would expect order volumes to remain steady in the short term despite macroeconomic uncertainty. Lessors seem to be less speculative than during previous cycles, which is keeping demand more consistent and rationalize. With the continued growth in our backlog, Trinity is beginning to take orders for production space in 2024. We continue to believe that our ability to provide railcars for shippers, railroads and other leasing companies give us the broadest view into trends and dynamics in the industry and ultimately drive strong returns for our shareholders. The GATX multi-year order demonstrates the strength and the long-tenured relationships we maintain in the industry. With this renewed supply agreement, we expect to deliver a mix of 15,000 newly built tank and freight railcars over a six-year period. We look forward to continuing this partnership which provides a base load of orders over the next six years. Moving to slide five. Our revenue for the quarter was $497 million, up 18% year-over-year and our adjusted earnings per share of $0.34 was up $0.16 year-over-year. Our cash flow in the quarter was $9 million and free cash flow was a negative $42 million. Eric will cover our cash flow in more depth. But in short this is what we expected for the quarter as we continue to grow our working capital to prepare for the increased pace of deliveries and mitigate as much supply chain risk as we can. Please turn with me to slide 6 for segment results. Our Leasing segment revenue of $195 million remained consistent compared to last quarter and we ended with a slightly smaller fleet. We saw renewal rates up over the expiring rates in the quarter and the renewal success rate of 82%. This is our fifth quarter with a positive FLRD and as we continue to reprice our fleet, we expect to see revenue growth in the segment, which flows straight to the bottom-line. Revenue is also impacted by the change in fleet composition as a result of net lease fleet investment activities. Excluding car sales, operating profit margins in our Leasing and Management segments slightly declined sequentially due to higher fleet operating costs as well as higher depreciation levels in support of our sustainable railcar conversion program. Total operating profit margin for this segment benefited from the $25 million gain on the railcar sale to Wafra continue to view gains on railcar sales as a normal and recurring part of our business. Fleet optimization is an ongoing process. Having the dual levers of production and owning a fleet, gives us several options to decide how best to allocate our capital. Looking at Rail Products, our revenue of $597 million was up 39% sequentially and 76% year-over-year driven by a large increase in deliveries in the quarter as well as better pricing dynamics. Our operating margin of 4.4% also improved sequentially up 120 basis points due to better pricing dynamics and railcars delivered. In the quarter, we booked a gain of $1.1 million due to insurance recoveries. This is excluded from our adjusted consolidated results, but included in the Rail Products Group. Removing this gain our Rail Products operating profit margin would be 4.2% in the quarter. While supply chain issues have been improving across the network, our production and deliveries in the quarter were negatively impacted by rail service issues and congestion at the US-Mexico border. I'm proud of the way our operations team has adapted to this changing environment to meet the needs of our customers. This flexibility has come at a cost affecting operating margins by 300 basis points in the quarter. Finally, moving to slide 7. I'd like to highlight a few additional activities we undertook during the quarter in support of our longer-term strategic initiatives. We amended and renewed our revolver for a new five-year term and amended both our warehouse and revolver facilities to be indexed to SOFR in anticipation of the upcoming phase-out of LIBOR. We repurchased $14 million worth of shares and now have $34 million remaining on our current authorization. Year-to-date our net investment in the lease fleet is $176 million which went down in the quarter due to our large portfolio sale to Wafra more than offsetting additions to the fleet. Our sustainable railcar conversion program continues to have good results and the current conversion backlog is 2420 railcars. Finally, I am proud to report that, Trinity completed its first ESG road show. The presentation is available on our website if you are interested in reading about some of the great initiatives our team is pursuing. I'm impressed by Trinity's focus on improved sustainability both for our business and for the industry as a whole as we fulfill our company's purpose of delivering goods for the good of all. And now, I'll turn the call over to Eric to review our financial results.

Thank you, Jean and good morning, everyone. I'll start my comments on slide 8. Starting with the income statement. Our total revenues of $497 million, reflects higher external railcar deliveries. Our adjusted earnings per share from continuing operations are $0.34 and exclude the gain from the insurance recoveries. As Jean mentioned, we benefited from a $254 million lease portfolio sale to Wafra in the quarter. Moving to the cash flow statement. Our cash from continued operations was $9 million and our free cash flow was a negative $42 million for the quarter. This is mainly due to a year-to-date working capital increase of $226 million, which is a function of multiple factors. First, as we prepare for higher deliveries, we've increased our inventories in anticipation of the accelerated pace of production. Inventories have also been affected by rail service issues at the border that Jean mentioned. And finally, in the current environment, raw materials are more expensive. As we deliver the railcars currently in production, we expect to see our cash flow improve. Our net lease fleet investment year-to-date is $176 million. The third quarter included $217 million in new railcar deliveries for our lease fleet as well as a small secondary market portfolio purchase. In addition to the Wafra car sale, we sold additional leased railcars in the quarter for total proceeds of $300 million and a gain of $34 million. Secondary market valuations remained strong, reflecting assumptions of rising lease rates and increased input cost in new railcars. We remain disciplined in our secondary market transactions and view these transactions as an effective way to optimize our fleet and take advantage of any opportunities we see in the market. Continuing our conversation on liquidity, please turn to slide nine. Our liquidity is currently $465 million. In the current rising interest rate environment, our debt profile contains a favorable mix of fixed to floating rate debt, relatively low interest rates, and no maturities until 2024. This debt profile, combined with the strength of our lease fleet and a robust manufacturing backlog, provides us with good visibility of our cash flow over the coming quarters as we continue to optimize our business. While we are not prepared to give commentary on 2023, we think railcar demand will remain strong and we expect to exit this year with good momentum and visibility. Please turn to slide 10, where I'll talk about our expectations for the rest of 2022. We continue to think industry deliveries for the year will be between 40,000 and 50,000 railcars, which is predominantly driven by replacement demand. Our views have not changed as we have progressed through the year despite macroeconomic headwinds. We are revising our guidance on net lease fleet investment for the year to a range of $250 million to $300 million due to lower internal deliveries and higher railcar sales. Given the nature of the macro economy, we are managing our cadence of investment as some deliveries had moved into next year. We've also been able to take advantage of an attractive secondary market and have had higher railcar sales than previously forecasted. Year-to-date our net lease fleet investment is $176 million and includes $532 million of fleet additions both through internal deliveries and secondary market additions and $159 million of fleet modifications and conversions, offset by $515 million in railcar sales. We are still on target for our three-year net lease fleet investment forecast. And finally, with nine months of the year complete, we are reinforcing our adjusted EPS guidance range of $0.90 to $1.10 for continuing operations. Our fourth quarter results will rise sequentially due to higher expected external deliveries. However, we want to acknowledge that any further rail service issues or other supply chain challenges, may delay some deliveries into 2023. We believe, we have good line of sight into fourth quarter deliveries and have been working all year to mitigate risk in our supply chain. And while we are insulated from higher interest rates, we are not immune from their impact. Our full year guidance reflects much higher interest expense in the year, than we expected. Before we take questions, I did want to briefly talk about our three-year targets, we introduced in November of 2020. 2023 will be year three of our plan. And despite a challenging and unanticipated operating environment over the plan period, we remain on track to meet all but one of the objectives that we put forth. In 2020, we projected cash flow from operations of $1.5 billion to $2 billion over the three years. Through seven quarters, we have generated $563 million. And with our visibility into 2023, we are revising our target. We believe our three-year cash from operations will come in between $1.2 billion and $1.4 billion. Our initial assumption included cash flow from our highway business, which is removed in this update. Additionally, significantly higher working capital in geography of railcar sales is impacting our forecast for cash flow, with a partial offset due to the timing of cash received from our income tax receivable. We believe, we are still on track for the rest of our three-year targets, despite a lot of unexpected headwinds in the market and we will continue to update you if our expectations change over the next year. Put it all together, I want to reinforce Jean's comments from the start of the call. We think our third quarter results are proof of our ability to execute our goals and we feel positive about the progress we're making. With strong forward-looking metrics, we expect to end 2022 with a lot of momentum into 2023. And now, operator, we are ready for our first question.

We will now begin the question-and-answer session. [Operator Instructions] And our first question here will come from Allison Poliniak with Wells Fargo. Please go ahead.

Hi, good morning. Certainly, lease rate metrics today are pretty solid as you look at whether the renewal and the pricing and so forth. Macro concerns are certainly weighing on certainly the sentiment here. Could you maybe give a little bit more color just on an absolute basis, what you're seeing in terms of stabilization? Is there any verticals that maybe you're a little bit more incrementally worried about? Just any more color on how you should be thinking through that market over the next couple of months. Thanks.

Sure. When you're looking at the different markets, Allison, it really is pretty broad-based as far as the demand as you can tell from our utilization. We still have some small pockets of tank cars that aren't being used. But as we look at the possibility of going into a mild recession, the markets that are closer to the consumer and the consumer spending are probably the most at risk that's going to be automotive and then some of the products that are going to move by intermodal. If you're looking at the chemical market, North America has strong performance there, probably going to insulate that somewhat. And energy and agriculture typically move independent of what's going on with the economy and that leaves construction. So you will see some pressure from the housing market going down. But the infrastructure bill that was passed should give us some movements or support there, especially when it comes to things like aggregates or asphalt.

Great. Thank you. That's helpful. And then on the rail manufacturing, a sizable headwind from the transport side of it. You mentioned the US and Mexico issues. With I would say appears deliveries would ramp up again in the second quarter or the fourth quarter, how should we think about that headwind? Does it start to dissipate a little bit, or does it even accelerate just given the level of deliveries you're expecting in the text of the year? Just any thoughts there.

So the nice thing Allison is, we've not experienced the same headwinds this quarter as yet. Last quarter though, we had 20% loss in production days at our highest volume manufacturing plant and 10% at the next highest volume. So it was a pretty big impact. We were able to offset some of that with some overtime and some weekend work, but it was a major headwind for us between 500 and 1,000 cars in the quarter that were already in process of being built that could not be delivered. So we've got to get past that. We -- again, we're seeing improvement. We're just hoping that maintains.

Perfect. Thank you. I’ll pass it along.

Our next question will come from Justin Long with Stephens. Please, go ahead.

Thanks and good morning. Just a follow-up on that last question. Jean, I think you mentioned that the cross-border issues were about a 300 basis point headwind to margins. I just wanted to clarify if you were referring to the rail product group margins on that? And then, for Eric, when you look at the net lease fleet investment, the guidance came down by $175 million at the midpoint. It sounds like that's a combination of a higher level of railcar sales and a lower level of investment in the lease fleet. But is there a way to break down those two buckets and what drove that $175 million reduction?

Sure. And I'll answer the first one Justin. Yes, that 300 basis points was with the Rail Products margin that I was talking about and the cause was what I just talked to Allison or answered Allison on.

Yes. Justin, this is Eric. So you're right in that, the driver in the reduction in our net fleet CapEx -- our net fleet investment is a combination of lower deliveries. Some of that is the deliveries that are pushed out this year that Jean just referenced that impacted the third quarter, some of those will fall out of the year. And then, we certainly see a very strong secondary market right now. And with the railcars that we've delivered and with our -- along with our three-year outlook on net fleet investment, we just think it's a good time to execute on that and increase car sales as a result. So the market is there. And so, that combination of those two things gets you that fleet investment. It's more led by push out deliveries in car sales, but it is a combination of the two.

Okay. Got it. And my second, I wanted to follow up on the commentary about the secondary market. It sounds like it's still pretty strong today, but obviously interest rates are moving higher. I'm curious if you have any initial expectations for how the secondary market trends into 2023. And obviously, there's been a higher level of railcar sales in recent years. Any thoughts around what a normalized level of gains on railcar sales could look like?

So, I -- not normalize -- I'm not going to give you a normalized level of gains. But I would say that there is going to be activity. Some of that is dependent on how much lease origination activity would do. Obviously, the more lease origination activity the more that would flow through the gain line, but that's kind of dependent on the market and what our customers choose to do. Going back just to the secondary market, you're right in that interest rates are higher. I would tell you that what we're seeing in our experience is in the secondary market is that there is certainly an expectation that lease rates will continue to improve, as buyers are assuming higher lease rates. I commented a little bit of that in my script that, in the -- that's providing attractive valuations in the secondary market. So while interest rates aren't going up that does affect funding costs, the revenue line or the assumptions on lease rates are also going up in line with that, which speaks to the overall tightness in the market and the outlook for rail growth longer term.

Okay. Got it. Thank you.

Our next question will come from Matt Elkott with Cowen. Please, go ahead.

Good morning. Thank you. So based on you guys' outlook for doubling deliveries in the second half, I think, I come up with like 6,000 cars in the fourth quarter. I was wondering if you can comment on the pace of that delivery -- quarterly delivery number going forward into 2023, do we see a step down in the first half or do you continue at that pace?

So Matt, we will come back in February of next year and give you our guidance for 2023. As we look at the fourth quarter, we have now hired all of the manpower that we need to produce the product for this year. And so that is a good sign. So, we should be finishing the acceleration of that ramp very shortly, and then be able to do some things, like I mentioned in my prepared remarks. We're already starting to take orders into 2024. So, that's the front tidbit I'll give you besides we'll be back in February. One -- I'm sorry let me tell you one more thing Matt. The other thing is our inquiry levels still remain in line for the industry to have 40,000 to 50,000 railcars delivered next year.

Okay. That's helpful. But is there typically kind of -- is there anything structural about any first quarter typically that would cause deliveries to step down a bit, or not necessarily given the fact that you guys have been ramping up resources? Just trying to kind of get a sense of how the lumpiness could play out in 2023.

There's no structural issues that would change anything.

Okay, got it. And then just one quick question on lease rates, it's good to see that the lease rate momentum is continuing. I think the improvement on a quarter-over-quarter basis, sequentially has been somewhere in the high-single-digits to mid to high-teens for the industry for you guys maybe. Can you talk about the magnitude of the percentage increase in the third quarter over the fourth quarter? And do we naturally see that moderate going forward given the fact that it's been going on for two years now?

Matt, what do you -- are you asking us to project the FLRD for the fourth quarter. Is that what you're -- is that the nature of your question?

No. Well, Eric just for the third quarter first, what are -- if we take what the average lease rate on the renewals in the -- actually my question was on spot rates. So like in the spot market, what's the percentage improvement in the third quarter versus the fourth quarter, if you take like a cross-section of the fleet?

So yes, I don't know if I'm going to get into all the details on that. I would tell you that sequentially lease rates continue to improve. And when you look at both a combination of interest rates and asset -- new railcar asset prices and the tightness in the market, lease rates should continue to improve. And so, we would expect lease rates to continue to improve sequentially from where they were in the third quarter to continue to improve into the fourth quarter into next year. I don't think we can be more clear than that.

Yes. That's helpful. And then, I know there's somewhat of a bifurcation between freight cars and tank cars and I think a bunch of tank cars are coming up for scheduled maintenance in the next few years. Can you talk about how that's going to impact the utilization number for the industry for tank cars optically and effectively if there's a real impact?

So I think you're referring to two things. One is the phase-out of the flammable tank cars which for ethanol hits in May of 2023. And then, next 2023 is just naturally a higher year for tank car compliance for tank cars that were built in 2013, 2014, et cetera. Both of those will have an impact on terms of the phase-out. I would tell you the industry has done a very good job of getting to that point most of those cars in ethanol service are compliant and we see line of sight for the ones that are not compliant today that there are either going to be modified or replaced with new tank cars. So, I don't think there's any kind of dramatic supply changes from that standpoint. We will see more compliance next year and years to come. And so that could have an impact in the -- what you see in the AAR numbers because railcar -- those tank cars that hit shops won't move for potentially six days or longer. So that could have an impact that makes it look artificially low. The other side of it is it's going to put pressure on existing tank car. The fleet will -- that will make the fleet a little bit tighter. And so we do think that that is factoring the shippers fleet planning decisions as they go into 2023 and 2024.

Great. Thank you, Eric. Thanks and I appreciate it.

Thank you.

Our next question will come from Bascome Majors with Susquehanna. Please go ahead.

Yeah. For the fourth quarter can you talk a little about the higher interest expense or give us a range of what's embedded in the guidance? And as far as the $0.40 to $0.60 implied for this quarter, I know, you aren't going to walk that into next year. You've been pretty clear about that. But if there are any pieces of that guidance or big levers to pull where you do have visibility and want to make sure that the sell-side and the buy-side are cognizant of that if you would give us a little qualitative look at pieces of that that would be helpful. Thank you.

I'm going to start with the second piece and then Eric will come back on the interest. So some of the pieces that I would put together is we've been talking for a while now about our belief that the industry deliveries will be 40,000 to 50,000. And we said that for this year. We talked about the next couple of years being there. When you look at the industry as a whole with that, kind of, stability and the number of cars that need to deliver it should help all players get better on their efficiency because you're not going through the ramp up or ramp down that you typically do. You do when you have either a higher input or higher lift in the cycle or when you're going down. So those things should help stabilize what's going on and give companies the ability to maximize that efficiency to iron out any of the problems that they've seen as they've gone through the ramp-up. And I'll let Eric go to interest.

So Bascome, while I'm not going to provide line-item guidance I will tell you that a reminder that our fixed to floating rate debt were about 80% to 20% fixed to floating. But that's still -- you did see the interest expense step up kind of throughout the year as the floating rate markets have as the benchmarks have increased. When you -- we're not projecting any significant changes in the mix of debt or the levels of debt with the fleet investment guide that we have. So I would tell you that the third quarter is a pretty good proxy for the run rate that we're expecting.

Thank you both for helpful answers. And maybe we could take it a step back to some of the cost of the capital discussions earlier. Can you talk -- as far as an incremental lease that you're underwriting today at a market level cost of capital can you talk about the returns that you think you're getting? And how attractive do you feel those are? And whether that incremental lease is in line with your long-term goals? And so maybe a little bit about Trinity and anything you'd like to add about the sense of the market participants that are buying this equipment and leases off of you and how they're underwriting targets or behavior has changed in the last three to six months? Thank you.

Sure, Bascome. So I would tell you that yes we are very focused on our weighted average cost of capital. And when it comes to lease originations and our underwriting process. I feel that we are very disciplined in setting hurdle rates based off of the markets that we're serving. And what we've seen in lease pricing even in light of higher interest rates and changes in our hurdle rates we have seen market lease rates support those higher valuations on new railcars and support the yields and the return targets that we have for the company that we laid out three years ago. So when we look at the lease originations that we're adding to our fleet both that we're adding the fleet in the current quarter and what's in our lease backlog, we believe those will be accretive to our margins and supportive of our long-term return targets. In terms of how the market has changed? I think the market has shifted. People have reacted differently in terms of higher interest rates strength of the dollar inflation. I think there's a lot less speculative ordering in the market today, which provides a lot more discipline. And RevPAR is less likely to have to find a home in a desperate sort of way. So from that standpoint I feel really good. It feels like a rational market. And that's supportive where things get maybe more aggressive than the secondary market because you're not speculating as much. And that's you're taking known deals and a little bit more of an auction process of that may have a little lower hurdle rate than some of the lease originations that we're seeing.

Thank you for both of those angles. And just one clarifying piece on next year if you could share. Does the denominator of the expiring lease rate based on how the portfolio is constructed today, does that go down again next year, or is that starting to stabilize when we think about the renewal rates and the inputs of both the current rate and the expiring rate? Thank you.

There's always a mix to the FLRD in terms of changes in each quarter that we add in each quarter that would come up. So I'm not sure I can give you a good answer on that in detail. So I think I'm just going to have to leave it at that. We can follow-up.

Our next question will come from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Thanks, good morning. Jean, you expect some industry resiliency to a modest recession but we've seen ocean freight decelerate. I think there's been some cautious commentary from some of the truck companies. And historically of course, railcar orders and traffic are affected by GDP. So can you just talk a little more about why you're confident the industry could sidestep a slowdown?

Sure. When you look at the balance of supply and demand that's going on right now in the industry and the fact that Eric just mentioned that in this cycle everyone has been a lot more disciplined without the speculative orders. That is very prominent in my rationale. ESG, as we discussed, much more at the tables and the benefits of rail over trucks and what that can mean along with the cost differential. So if the service levels continue to improve on the roads. We see this as an opportunity to finally start moving some of that modal share back from highway over to the rails. And I guess the last point I'm just going to make is we talked about the fact that we're already starting to take orders into 2024. And the fact that our customers are making those long-term decisions and investments. So we still don't believe a short-term blip or change is going to affect that.

Okay. Well, the low interest rate environment we lived with for the past 10 years drove a lot of lease fleet investment obviously. Do you expect higher rates will have the opposite effect meaning rather then having a long stretch of deliveries well above theoretical replacement, where we'll see underinvestment in the fleet?

Steve, I would say that capital – that lease capital – railcar leasing is still attractive from a capital standpoint and it's more on a risk-adjusted basis. So it's all relative value. And I do think that railcar leasing has relative value. And the more we can make it a stable market that has less cyclicality, the more attractive that will be long-term, but these are long-lived assets that have attractive return characteristics. And so I think it will still be attractive for capital long-term.

Well, I know you're focused on improving pretax ROE. But if we get into a better part of the cycle, why is that the right metric to manage to as oppose to EPS growth rate, or maybe some more directly cash flow based metric that may resonate more with investors?

So I think that's an important question. And I think when you look at how we measure our business, we think return on equity and the economic profit is long-term the best way to measure our business and measure success. Other companies have different incentives that it drives different behaviors. We believe that the measures we have in place will drive disciplined long-term value creation that we think aligns with our shareholders. And that's how we view it.

Got it. And this is my last question. I guess the reason I ask if deliveries are up next year you should see good earnings leverage. But if you grow the lease fleet at the same time, it can mask EPS upside. So I guess echoing an earlier question what should we be expecting as we think about you leveraging production growth into EPS growth?

So in the prepared remarks, Eric mentioned the fact that there is only one of the metrics that we gave you on the Investor Day in November 2020 that we're not going to hit. So if you go back and look you're going to be able to see where we are now and our investment in the lease fleet and where we expect to be at the end of three years. Also it gives you the ROE, EPS. So it gives you the metrics I think that you need to look at to see where we're heading. And I mean really proud of the team. They've taken a lot of headwinds in the last two years. And the majority of all of those metrics, we still see line of sight to hit.

Okay. Thanks.

Thanks Steve.

This concludes our question-and-answer session. I'd like to turn the conference back over to Jean Savage for any closing remarks. End of Q&A:

Well, thank you and thanks everyone for joining us this morning. As you've heard on our call today, our third quarter results show progress and improvement in our business despite continued headwinds in the rail network. I am extremely proud of our dedicated team and how they've managed these unexpected challenges, and I continue to believe Trinity will perform well in the coming years. Thank you again for your support.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.