Savage: “Trinity Managed Through Significant Headwinds” in 2Q20

Written by Andrew Corselli
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“I am pleased Trinity’s rail platform continues to display its resiliency with strong cash flow generation stemming from the platform synergies,” said Jean Savage, Trinity Industries CEO and President.

Trinity Industries, Inc. announced financial and operating results for second-quarter 2020, and, like many in the industry, it navigated “significant headwinds related to the COVID-19 pandemic and economic fallout”—to the tune of a $206.9 million loss. Quarterly total company revenues of $509 million and quarterly loss from continuing operations per common diluted share (EPS) of $1.76 and quarterly adjusted EPS of $0.02.

Trinity Financial and Operational Highlights:

  • The quarterly loss from continuing operations per EPS of $1.76 and quarterly adjusted EPS of $0.02 excludes the following:
    • Non-cash impairment of long-lived assets totaling $1.86 per common diluted share.
    • Additional income tax benefit of $0.10 per common diluted share related to the effects of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
  • Year-to-date cash flow from operations and free cash flow before leasing investment of $328 million and $372 million, respectively.
  • Year-to-date investment of $127 million in leasing capital expenditures, net of railcar sales, predominantly for growth.
  • Total committed liquidity of $709 million as of June 30, 2020:
    • Expanded lease fleet borrowings by $225 million subsequent to quarter-end.
    • Expects $303 million in federal income tax refunds in 2020, and an additional $150 million in 2021, as a result of utilizing loss carryback provisions included in the CARES Act.
  • Annualized cost savings of $70 million underway, encompassing both structural and cyclical savings.
  • Year-to-date returns to shareholders of $82 million through dividends and share repurchases.

“During the second quarter, Trinity managed through significant headwinds related to the COVID-19 pandemic and economic fallout while executing on optimization initiatives to support the transition of our rail-focused strategy,” said Jean Savage, Trinity Industries CEO and President. “Our first priority is the safety of our employees, and we have taken actions designed to prevent community spread of the virus within our manufacturing facilities and administrative offices while ensuring business continuity. Our people have risen to the occasion with a spirit of resilience and collaboration—completing significant milestones in the streamlining of our organization structure and further positioning Trinity’s rail-platform for improved financial performance.

“Our businesses are facing challenging market dynamics resulting from the historic decline in rail car loadings and the resulting underutilized rail cars in North America. Commercially, our primary focus is to maintain the utilization of our lease fleet, then to meet customer demand for newly manufactured railcars as appropriate. Our lease fleet utilization is holding around 95%, albeit with pricing pressure on lease rates, and our production capacity for 2020 rail car deliveries is essentially sold. The timeline for a recovery in the rail sector remains unclear as increasing COVID-19 cases in the U.S. potentially threaten the recent improvement in economic and rail market activity. However, we are seeing a strong increase in rail car inquiries relative to last quarter from strategic buyers and large leasing customers, and we expect a number of these will turn to orders or lease contracts in the near term.

“Trinity has realigned its organization from the previous holding company structure, to an operating model centrally focused on our customers’ business needs. As we work through the process flows for various production and service functions, we are establishing additional structural savings goals that will be part of our near-term focus. We are also prepared to take further actions to reduce our cost structure and manufacturing footprint in the event of a prolonged rail car down cycle.

“I am pleased Trinity’s rail platform continues to display its resiliency with strong cash flow generation stemming from the platform synergies. Leased rail car assets remain attractive to the capital markets, and we’ve had continued success in financing new rail car portfolios and selling railcars to our institutional investor partners in mutually beneficial transactions. Trinity delivered second-quarter cash flow from operations of $154 million, made a net investment of $94 million in our leasing and manufacturing businesses, and returned $24 million to shareholders in the form of dividends—highlighting again that Trinity’s platform enables meaningful investment in the business for growth while returning substantial capital to shareholders. Our liquidity stayed strong at $709 million at quarter end, and has been further enhanced by the recent completion of the $225 million rail financing and amendments to our corporate revolver in the month of July. We are committed to delivering long-term shareholder value, and Trinity is taking the necessary steps to optimize our business and position the company for an acceleration in financial performance.”


Jason Seidl

“Trinity (TRN) is well-positioned to navigate the North American railcar market through its manufacturing business and growing leasing operation in the intermediate-to-long term,” said Cowen and Company analysts Jason Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer. “The company’s spin-off of non-railcar businesses should unlock more value than has been possible within the framework of the previous model. We are lowering our earnings estimates and price target and believe that further near-term stock pressure is possible. However, a railcar demand trough looks increasingly in sight within the next year, and TRN’s hybrid model and ongoing multi-pronged transformation position it well for an eventual recovery. We rate TRN Outperform.

“We expect railcar spot lease rates to bottom late this year and begin a gradual recovery in 1H21. This should be driven by three primary factors:

  1. “Decelerating rail traffic declines in 2H20 and a swing back to growth beginning in 2021.
  2. “In the railroad industry, the resiliency of the industry-wide, far-reaching capacity rationalization by the Class I’s as part of PSR has not yet been tested in a growing traffic environment and could lead to service hiccups, something that would be a driver of equipment demand.
  • “Increased scrapping within parts of the industry’s idle railcar population that are inching toward obsolescence, such as DOT-111 tank cars and certain types of grain and box cars.

“While we are trimming our 2021 earnings estimate, TRN’s stock should begin to experience positive momentum when more investors have a line of sight to our aforementioned lease rate recovery in 1H21.

“TRN remains well positioned in the intermediate-to-long term. It has carried out transformative changes in the past couple of years but it is not quite finished yet. One ongoing effort is the continued transition into being primarily a lessor. In addition to pursuing targeted fleet growth through its manufacturing segment and potential secondary market opportunities, the company is looking to grow the services side by adding new and adjacent offerings. This would boost its ability to compete with other operating lessors as well as bank-owned fleets. We would be unsurprised if the company converted more of its manufacturing footprint into maintenance and service facilities to support its leasing operations.

“While it is likely to remain one of North America’s two largest railcar manufacturers, TRN, which has historically had 30-45% of the industry backlog, does not appear too concerned with maintaining a certain market share in manufacturing.”

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