Trinity: “Meaningful Progress in 2019”

Written by Andrew Corselli, Managing Editor
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“Trinity made meaningful progress in 2019 on the Company’s strategic and financial priorities in our first year as a rail-focused company,” said Melendy E. Lovett, SVP and Chief Financial Officer.

Trinity Industries, Inc. released its 4Q19 and full-year 2019 earnings, which show it saw quarterly total company revenues of $850.7 million, reflecting growth of 15.7% year-over-year, but also quarterly earnings from continuing operations per common diluted share (EPS) of $.18, a yearly decrease of 5%.

Other 4Q19 Results

  • Adjusted EPS increased 35% year-over-year to $.35 and excludes $.09 per share related to restructuring activities and $.08 per share related to the effects of a one-time, non-cash, deferred tax impact related to planned expansion of its Maintenance Services operations.
  • Quarterly revenues from leasing and management services of $189.9 million with a 42.2% operating profit margin.
  • Growth of the wholly owned and partially owned lease fleet to 103,705 units, with lease fleet utilization of 96% at quarter-end.
  • Rail Products Group quarterly revenues of $887.6 million and an 11% operating profit margin.
  • Rail Products Group quarterly railcar orders and deliveries of 2,585 and 6,880, respectively, resulting in a total railcar backlog of $1.8 billion at quarter’s-end.
  • Repurchases of approximately 2.9 million shares at a cost of $60.8 million.

Full-Year 2019 Results

  • Full-year total company revenues of $3.5 billion, reflecting growth of 19.8% compared to 2018.
  • Reported EPS of $1.09, an increase of 56% compared to 2018
  • Adjusted EPS increased 64% to $1.26 and excludes $.17 of one-time charges occurring in the fourth quarter.
  • Total net additions of 4,490 railcars to the wholly owned and partially owned lease fleet during 2019, an increase of 4.5% from 2018.
  • Rail Products Group delivered 21,960 railcars in 2019, an increase of 9.2% from 2018.
  • Repurchases of approximately 13.7 million shares at a cost of $294.7 million, which includes 2.6 million shares at a cost of $70 million representing the final settlement of the ASR Program funded in 2018.
  • Increased loan-to-value ratio of wholly owned lease fleet (including corporate revolver) to 55.1% at Dec. 31, 2019, compared to 46.6% at Dec. 31, 2018.
  • ROE and Pre-Tax ROE improved significantly in 2019 to 5.6% and 9%, respectively, compared to 4.3% and 6.3%, respectively, in 2018.

“Trinity made meaningful progress in 2019 on the Company’s strategic and financial priorities in our first year as a rail-focused company,” said Melendy E. Lovett, Senior Vice President and Chief Financial Officer. “While railcar industry fundamentals declined throughout the year as a result of uncertainty in trade policy and the North American industrial economy, Trinity’s team delivered strong results in a very challenging market. Continued growth of our leased railcar portfolio, an emphasis on improving our lease rates while maintaining high utilization, and higher manufacturing railcar deliveries with a favorable product mix resulted in a 32% increase in full-year operating profit year-over-year. Our senior leaders have made significant strides in improving operating performance and reducing our corporate costs by 28% during 2019.

“We are progressing well in the execution of our key financial priorities, including lowering our cost of capital, deploying capital to return-accretive investments, and returning meaningful and steady amounts of capital to shareholders. Trinity’s Pre-Tax ROE significantly improved to 9% in 2019 as a result of improved profitability and substantial progress in optimizing the Company’s balance sheet. During the year, Trinity returned $376.8 million of capital to shareholders, approximately 14% of our market cap, reflecting the strength and synergies of Trinity’s rail platform and our commitment to improving shareholder value.”

2020 Outlook

“I am thrilled to officially join Trinity Industries and lead this Company into its bright and promising future,” said Savage. “The railcar industry is experiencing changing dynamics across the industrial end markets we serve, including increasing customer service expectations and the utilization of technology within supply chains. As a result of our rail-focused strategy, we have an opportunity to assess our business, evaluate our processes, and align our organization to deliver a premier experience for our customers based on their evolving business needs. Our results must be highly effective, highly efficient, and highly profitable for all our stakeholders to be successful—and I believe there is significant opportunity to unlock greater value at Trinity.”

E. Jean Savage became President and CEO of Trinity Industries in February.

Cowen Insight

“Guidance is well above consensus, aided by what we see as a warranted revision of the useful life and salvage value of railcars,” said Cowen analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer. “Without this revision, guidance is largely in line with the Street despite lower expected gains from leased railcar sales. Trinity’s estimates for railcar deliveries and manufacturing margin are somewhat below our forecast. All in all, solid print given market weakness.

“Trinity guided for 2020 EPS in the range of $1.15-$1.35. The $1.25 midpoint is above our $1.20 estimate and consensus of $1.08. The guidance includes a favorable impact of $.14-$.18 from a revision of the useful life and salvage value of certain railcars in the lease fleet. Excluding this revision, and based on the $.16 midpoint of the aforementioned benefit, the EPS guidance range would be $.99-$1.19, with a $1.09 midpoint, just above the $1.08 Street estimate. The company is assuming operating profit from sales of leased railcars of $50 million, compared to the $92 million achieved in 2019. Our channel checks suggest that secondary market valuations remain solid despite weakness in underlying freight demand.

“Trinity noted that, based on its analysis of historical fleet data, a review of industry standards including those of direct leasing peers, and consideration of certain economic factors, it has determined that it is appropriate to revise the useful lives and salvage values of certain railcar types in the lease fleet. This is expected to result in a change in the weighted average useful life of railcars in the fleet to 37 years from 34 years. Trinity expects annual depreciation expense to be between $27 million and $33 million lower this year.

“Total 2020 revenues are expected to be in the range of $2.5 billion to $2.7 billion, compared to our and Street estimates of $2.8 billion and $2.7 billion, respectively. The company expects to deliver 16,000 railcars this year, compared to our estimate of 16,400 units. It projects a manufacturing margin of 7%, compared to our 8.1% estimate. The decline in the manufacturing margin from nearly 10% in 2019 is due to lower deliveries and a likely unfavorable mix shift. We believe the tank car percentage of deliveries may decline this year, but we would expect it to begin increasing again starting in 2021 as we get closer to the regulatory deadline for ethanol car replacement.

“Guidance includes $25 million-$30 million in SE&A and other cost reductions. Some part of this could be related to lower legal expenses associated with the guardrail case, although the company is likely still baking in some legal expenses related to state cases.

“Adjusted 4Q19 EPS of $.35 was a penny above our estimate and $.03 above consensus. Revenue was $850.7 million, below our $874 million estimate but well ahead of the Street forecast of $807.6 million.”

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