For Trinity, Cautious Optimism in 2021 (Updated, Cowen)

Trinity Industries’ financial and operating results for fourth-quarter and full-year 2020 reflect “the decline in railcar demand” following the pandemic, President and CEO Jean Savage reported on Feb. 24.

Savage noted that “market uncertainty as it relates to COVID-19 remains the predominant story on the economic and rail industry outlook.”

For fourth-quarter 2020, Trinity revenues were $415.6 million, down 51.1%, compared with $850.7 million in the comparable 2019 quarter. This was due to “lower deliveries in the Rail Products Group and fewer railcars sold from our lease fleet,” according to the company. The operating profit was $36.9 million, a 62% decrease vs. $97.2 million in the 2019 quarter. It includes $27.0 million of “non-cash write-downs of non-strategic rail maintenance facilities and certain other assets,” Trinity said.

For the Rail Products Group, revenues were $313.3 million, a decline of 65.2% vs. fourth-quarter 2019’s $899 million, due to “lower deliveries and railcar modification services,” according to the company.

For the Railcar Leasing and Management Services Group, fourth-quarter 2020 revenues were $189.3 million, down 0.32% from fourth-quarter 2019’s $189.9 million. This was due to “lower fleet utilization and lower lease rates on renewals, partially offset by growth in the lease fleet and higher lease rates associated with new railcar additions,” the company reported. The operating profit of $88.2 million for the last three months of 2020 was up 10.1% compared with 2019’s $80.1 million, reflecting “growth in the lease fleet, lower depreciation expense, and reduced operating expenses resulting from fewer maintenance compliance events scheduled during the current period,” Trinity said. No railcar sales were completed during fourth-quarter 2020.

Financial and Operational Highlights

Fourth-Quarter 2020:

• Quarterly income (loss) from continuing operations per EPS of $(1.13) and quarterly adjusted EPS of $0.04, which excludes the following (each per common diluted share): non-cash pension plan settlement charge totaling $1.03; non-cash write-downs of non-strategic rail maintenance facilities and certain other assets totaling $0.18; additional income tax benefit of $0.05 related to carryback claims as permitted under recent tax legislation.

• Repurchases of approximately 3 million shares at a cost of $68 million under previously announced $250 million share repurchase authorization.

• Completed financings of more than $500 million.

• Lease fleet utilization of 94.5% at year-end, with sequentially improved Future Lease Rate Differential to (13.6)%.

• Railcar deliveries of 2,235 and new railcar orders of 1,170.

Full-Year 2020:

• Total company revenues of $2 billion, representing a decrease of 33.5% when compared to 2019.

• Reported EPS of $(1.27) and adjusted EPS of $0.37, which excludes the following (each per common diluted share): non-cash impairment of long-lived assets totaling $2.07; non-cash pension plan settlement charge totaling $1.00; restructuring activities totaling $0.07; early redemption of high coupon debt totaling $0.03; income tax benefit of $1.54 related to carryback claims as permitted under recent tax legislation.

• Cash flow from operations and total free cash flow after dividends and investments were $652 million and $113 million, respectively. Investment of $464 million in leasing capital expenditures, net of railcar sales, predominantly for growth, resulted in net additions of 3,340 railcars to the wholly owned and partially owned lease fleet during 2020, an increase of 3.2% from 2019.

• Returns to shareholders of $285 million through dividends and share repurchases. Repurchases of 9.3 million shares at a cost of $193 million.

• Committed liquidity of $727 million as of December 31, 2020.

Management Insight

“Throughout the year, we evaluated our strategy, redefined our vision with a new purpose statement, and aligned our business values and organization,” Savage said. “While our leasing operations results performed well during the year, the decline in lease portfolio sales and railcar deliveries created earnings headwinds to overcome. Our team responded to the crisis and offset some of this headwind through strong management of our fleet maintenance costs and significant reductions in headcount and SE&A. Certain of the cost-savings and restructuring activities associated with the repositioning of the Company generated one-time charges that impacted our financial performance. Through it all, Trinity’s rail-platform proved resilient—generating strong cash flows from operations of $652 million during 2020, and free cash flow of $113 million after dividends and investments in our platform and lease fleet. In addition to the dividends paid, we also returned $193 million to shareholders through the use of our share repurchase authorization.”

2021 Outlook

“We see early indicators of a recovery with improving year-over-year railcar traffic volumes, slowing train speeds, and, more importantly, higher overall cycle times for shippers, all of which require more railcars to return to service,” Savage reported. “However, given the pace of improvement, customers are hesitant in their long-term planning for railcar assets. Industry forecasts currently suggest a recovery in the second half of 2021, and our customer inquiry levels align with these expectations.

“Our lease fleet utilization has remained stable through the beginning of the year, and we are seeing some improvement in lease rates. We expect our Leasing business to have comparable year-over-year financial performance as modest fleet growth and improved maintenance cost efficiency from utilizing our internal network are expected to mostly offset headwinds from renewing lease rates. We expect the Rail Products business to deliver better operating results in 2021 as we enhance the value of outsourced fabrication activities and implement more automation in facilities, against a backdrop of another challenging year for deliveries. When combined with additional cost savings initiatives in place, we expect earnings to improve from 2020 while still reflecting a challenging market environment in 2021. As a result of the strong cash flow synergies within Trinity’s business, we expect cash flow from operations to range between $625 million to $675 million for the 2021 year.”

More details can be found through Trinity Industry Investor Relations.

The Cowen Insight

“We’re lowering our 2021 EPS estimate, while our 2022 estimate and PT remain intact,” said Cowen and Company transportation equipment analyst Matt Elkott. “Following the approximately 5% post-earnings pullback [see my Railway Age column ‘The Cowen Take on Trinity, Wabtec’], we remain constructive on TRN [Trinity] and believe orders and lease rates will tick up progressively throughout 2021, setting up for marked earnings increases this year and next.”

Among the key Cowen takeaways:

• “We’re lowering our 2021 EPS estimate to $0.60, from $0.80, and maintaining our 2022 EPS estimate of $1.38 and our SOTP PT of $34. We are projecting an 81% increase in orders this year to 10.9K units off of an anemic 6K units in 2020. We forecast a 7% production decline this year to 10.7K units, from 11.5K units in 2020. This would represent a book-to-bill ratio just over 1.0, up from 0.52 in 2020. For 2022, we are modeling for orders and deliveries to increase 19% and 37% to 12.9K units and 14.7K units, respectively.

• “Despite the aforementioned 7% shipment decline we are expecting this year, we are assuming a 2.4% manufacturing margin, up very slightly from 2.3% last year, as the company continues to take steps to improve its cost structure. Longer term, we see TRN continuing to right-size its manufacturing footprint, with that segment representing gradually declining percentages of earnings over the course of full cycles in the future.

• “While the 4Q20 EPS result of $0.04 was an optical beat to the Thomson Reuters estimate of a $0.05 loss/sh, we had estimated the effective consensus estimate to be $0.11 [see my Railway Age column ‘The Cowen Take on Trinity, Wabtec’], well above the Thomson Reuters consensus but below the Factset consensus of $0.15. Our estimate was $0.05, a penny above the actual result.

• “Prior to [the Feb. 24] earnings release, TRN’s stock had been up approximately 112% since the April low, including an approximately 20% increase this year alone, creating a difficult setup for earnings such that the company would have had to report all but a banner quarter and strong outlook commentary for a pullback to be averted. In addition to what we view as a quarterly miss, TRN did not provide specific earnings guidance. We are not very surprised. We had highlighted in [the Railway Age column] our view that the ongoing improvement in freight market and rail equipment fundamentals would not have a material positive impact on the fourth-quarter results but would instead gradually benefit the company each quarter of this year and into next.”