Trinity Industries, Inc. (TRN) Earnings Call Transcript & Summary

Good day, and welcome to the Trinity Industries Second Quarter Ended June 30, 2026 Results Conference Call. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. 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 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 would 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 Mann, Vice President of Investor Relations

Thank you, operator. Good morning, everyone. We appreciate you joining us for the company's Second Quarter 2026 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 certain non-GAAP financial metrics. The reconciliations of the non-GAAP metrics to comparable GAAP measures are provided in the appendix of the quarterly investor slides, which are accessible on our Investor Relations website at www.trin.net. These slides are under the Events and Presentations portion of the website, along with the second quarter earnings conference call of that link. A replay of today's call will be available after 10:30 a.m. Eastern Time through midnight on August 6, 2026. Replay information is available under the Events and Presentations page on our Investor Relations website. It is now my pleasure to turn the call over to Jean.

Thank you, Leigh, and good morning, everyone. Second quarter earnings per share from continuing operations came in at $1.25 and reflecting the successful completion of our Napier Park partnership transaction alongside execution headwinds in Rail products better specific and transitional. The Napier gain was $132 million pretax and demonstrates the embedded value we have been building in our fleet. It is also proof of what this platform was designed to do. performed profitably through the cycle and convert hard asset value into shareholder returns. Rail Products came in below expectations at a 1.3% operating margin driven by two specific items we quantify at 270 basis points. Leasing continued to perform. Fleet utilization held at 97.3%, lease rates moved higher. Rail Products ended the quarter with a $1.6 billion backlog and a book-to-bill just below 1x. The demand signal is there. And on the last 12 months basis, our adjusted return on equity expanded to 32.4% and reflecting the impacts of the work completed on the business and the Napier Park and secondary market transaction in the last 12 months. Now let me walk you through what we're seeing in the market. The market is turning, not all at once and not without friction, but the direction is clear. The PMI manufacturing index has been positive for 6 consecutive months. Industrial production improved year-over-year. Carload growth is materializing across agriculture, energy and industrial construction segments, where rail has a natural advantage. In particular, agricultural carloads have shown the most strength due to soybean strength and steady increase in ethanol. Railcars and storage have been below 20% for the last 4 months. Inquiry levels for new railcars are strong, reflecting growing customer conviction that the cycle has turned and demand-side signals continue to be stronger than supply side signals. Rail structural advantages are playing to our favor as well. Fuel efficiency relative to trucking capacity constraints in the over the road network and increasing pressure on supply chains to reduce carbon footprints are all driving freight towards rail. These are durable trends and when I look at the core indicators, PMI, industrial production, carloads and inquiry levels, the trajectory is constructive and gaining momentum. We enter the second half of 2026 with growing confidence. I'll take you through both segments, starting with leasing and services. Leasing performed utilization held at 97.3%, renewal success rates improved to 75%, up from 60% in the first quarter. The future lease rate differential moved to a positive 3.5%, up from 1.2% in the first quarter. That is a meaningful acceleration and FLRD has now been positive for 20 consecutive quarters, a forward indicator that lease rates should continue to grow as renewals convert. These are the metrics that tell us the fleet is healthy and the market is supporting our pricing. Leasing revenues were down year-over-year, and the reason is structural. We closed railcar partnership transactions in Q2 2026 and Q4 2025 that reduced our own fleet. For context, in the second quarter of 2025, the revenue contribution from the consolidated Nature Park fleet was about $30 million. We are growing our overall platform while monetizing embedded fleet value and simplifying the balance sheet. As of June 30, our wholly owned railcar fleet stands at 96,280 railcars, and our investor-owned fleet count, which we manage is 50,650. Higher lease rates and stronger external repair pricing partially offset the revenue impact of the smaller consolidated fleet. Leasing segment operating margin was 79.8%, including the $132 million noncash gain from the Napier Park transaction. Excluding that gain, the leasing and services margin was 33%, reflecting higher maintenance and depreciation costs and the mix impact of a smaller consolidated fleet. Additionally, we incurred disposal charges related to the exit of certain logistics solutions locations in the quarter. On the portfolio management side, we completed $31 million of these portfolio sales in the quarter, generating $8 million in gains. The secondary market remains active, and we continue to use it as a capital allocation tool. In the Rail Products segment, we received orders for 1,560 new railcars and delivered 1,570 railcars in the quarter. ending the quarter with a backlog of $1.6 million. We currently hold just under half of the industry backlog. Revenues were down slightly year-over-year driven by lower deliveries. Rail Products operating profit margin came in at 1.3%. Two items drove roughly 270 basis points of that shortfall, an unplanned production interruption at our Longview manufacturing facility and temporary realignment expenses tied to our Mexico manufacturing footprint. Excluding those items, underlying margin was in the 4% range still below the annual trajectory we are targeting. Additionally, the mix of deliveries in the second quarter was less favorable than the first quarter. Last year, we initiated a significant consolidation and automation initiatives at our Longview operations, transitioning from 2 facilities to 1. While we are excited about the long-term operational improvements this project will deliver, it can affect our productivity while it is ongoing. We expect this project to reach completion early in 2027. The full year Rail Products margin is expected to land at the low end of our 5% to 6% range as production normalizes in the second half and mix improves in Q3 and Q4. The structural work we have done on automation, rightsizing and breakeven reduction is intact and performing. The second quarter results do not reflect that progress, but the full year will. Before I turn the call to Eric, I want to highlight a strategic development for Trinity. In June, we acquired a 32% interest and 2x Texmaco Railcar Leasing Private Limited, or TTR, which is a railcar leasing company in India. This is a joint venture with 2x Group, a global asset management company and Texmaco Rail & Engineering Limited, a rail solution provider in India. We are contributing our leasing expertise while gaining meaningful exposure to India, a growing rail market. While we do not expect material P&L contribution in 2026 as a joint venture completes its additional fleet build-out, we are excited about this JV's ability to generate solid returns and meaningful growth. In summary, we delivered strong EPS growth closed a significant transaction that demonstrates the value embedded in our fleet and maintain the leasing metrics that matter most: utilization, renewal success and LRD Rail Products had a difficult quarter on margin, but inquiries are growing, and our full year expectations are unchanged. The market environment is improving and Trinity is built to capture that improvement. I'm proud of how this team is executing, closing significant transactions, navigating a complex operating environment and accelerating into a strengthening market. The platform is sound. The leasing business is strong. The strategic moves we are making are the right ones and the team is focused on delivering in the second half. I'll now turn the call over to Eric, who will take you through the financials and our updated guidance.

Thank you, Jean, and good morning, everyone. Before we go through the financial statements, I wanted to quickly talk through the second quarter railcar partnership transaction with Napier Park. As you will recall, we completed the first piece of this transaction in the fourth quarter. Moving the TRP 2021 fleet to wholly owned and the tin fleet into our managed fleet and recording a noncash gain in that exchange. In the second quarter, we contributed our remaining membership interest in the Tribute partially owned fleet for 11.2% limited partnership interest in Napier Park SPE Holdings. The Tribute fleet is now part of our managed fleet and we no longer have direct ownership interest in Trip Holdings. Because the book value of this fleet was well below the market value we recorded a noncash pretax gain of $132 million in the second quarter. It is worth noting that while these transactions have simplified our financial statements and have allowed us to unlock significant value at our railcars, there were other notable impacts to our financial statements, especially in comparisons to prior periods. Starting with the income statement. Revenues for the quarter were $485 million, down slightly both sequentially and year-over-year, reflecting the deconsolidation of the partially owned leasing subsidiaries as these railcars move into the managed fleet the partially owned railcar count and [indiscernible] interest goes to 0, both expected outcomes of the partnership structure. Earnings per share in the quarter were $1.25, and up both sequentially and year-over-year as a result of the $132 million railcar partnership gain. We also recorded a gain of $8 million in the quarter from lease portfolio sales. Moving to the cash flow statement. Year-to-date cash flow from continuing operations was $172 million. We've returned $71 million this year to shareholders through dividends paid and shares repurchased. Year-to-date net fleet investment was $126 million. Cash flow from operations with net gains on lease portfolio sales was $81 million in the quarter, and $203 million year-to-date, reflecting significant cash generation even in a slower delivery environment. Turning to our balance sheet, we continue to work to strengthen and improve our financial position. We have liquidity of $1 billion. Our second quarter balance sheet now reflects the deconsolidation of all balances related to Trip Holdings, both on the asset side, the lower property, plant and equipment balance and the removal of the associated partially owned debt from our balance sheet. Furthermore, the other assets line item includes our new equity method investment in the Napier Park rotor fleet. Additionally, in the quarter, we amended and extended our $600 million corporate revolver to provide more flexibility and [indiscernible] 2025 Series 2026-1 secured railcar equipment notes to redeem in full the Series 2019-1 notes. The financial increased the loan-to-value on our wholly-owned lease fleet to 70.8%, which is slightly above our targeted range. The higher advance rate on the fleet reflects the increased market value supported by higher lease rates on our fleet. Our unencumbered fleet is approximately $900 million, giving us financial and operational flexibility. And now I'd like to give some thoughts on guidance for the rest of the year. We continue to expect 25,000 industry deliveries this year. well below replacement levels as customers manage through cost uncertainty and economic headwinds. Despite the softer delivery environment, we are maintaining capital discipline. We are slightly lowering our net lease fleet investment to a range of $300 million to $400 million with gains of $160 million to $180 million. Year-to-date, we have booked $162 million in gains, which means our guidance contemplated limited secondary market sales in the back half of the year. We are also holding our full year EPS guidance of $2.20 to $2.40 and expect Rail Products Group full year segment margin to be in the 5% to 6% range. This means we expect the Rail Products operating margin to normalize in the second half of the year as the headwinds we experienced in the quarter clear. Additionally, we expect rail products deliveries in the second half to be higher than the first half, which brings meaningful operating leverage on our cost base and supports the full year margin trajectory. To summarize, the balance sheet is stronger. Liquidity stands at $1 billion and our capital allocation property priorities are unchanged. Disciplined fleet investment, active portfolio management and returning capital to shareholders. The financial foundation is sound. The recovery drivers are in place, and we are holding guidance. We look forward to demonstrating that in the second half of 2026. The Operator, we are now ready for our first question

[Operator Instructions]. Our first question comes from Andrzej Tomczyk with Goldman Sachs.

Great morning. Appreciate the question. Just curious if we could start off on the tariffs just to get a little more clarity there. Our understanding is that the recent amendments to Section 232 investigations are imposing a tariff of up to 25% on the full value of tank cars imported into the U.S. Maybe if you guys could just speak a little more to your current understanding of the tariff situation. What's Trinity's current tank car backlog mix and just sort of broad thoughts on how this might filter through the system.

Yes. Thank you, Andre. I'll start with that. So as you know, our tank cars are manufactured in North America under USMCA. And we continue to engage with the U.S. Customs and Border Protection. We actually filed a formal ruling request with the CPP asserting our Section 232 exemption. Now our legal basis is different from other builders who rely on an exemption known as the international instrument of trade. When you look at this, we believe that our exemption is well grounded and does not have an effect, but we are waiting on the news to come back from them and they still agree with that. When you look at it, we also have flexibility. Our Longview facility produces tank cars, rail tank cars. And we believe we produce more than any other builder in the U.S. So we have flexibility to move that production around. When you look at the impact so far with those 232, it has slowed the order rate for new tank cars and we are seeing that. We're working with our customers to make sure that even under USMCA, if we do end up with any tariffs, it would be at the lower 10% rate. but we are building in flexibility for our customers. I want to go ahead and talk a little bit about the couplers because I think people are confusing though. There is an evasion case with a different builder on entry of railcars with non-U.S. produced couplers. We are not in that boat. We're not subject to that investigation, and we have a long-standing relationship with the U.S. manufacturer for those couplers. Actually, we've been paying up for those couplers for years. so I just want to make sure you understand those are two distinct areas, and the couplers doesn't apply to us.

Understood. I appreciate the distinction there as well. Maybe just a quick follow-up. If the tariffs are sort of deemed to be put in place after the fact on a going-forward basis. Would you escalate that in your contracts? And are you sort of expressing that with customers currently in conversations?

Absolutely, those discussions are happening as contracts are built. The majority of all of ours have escalation as part of the contract. So those would pass on.

Great. And maybe just touching on the quarter a little bit. You guys talked about the impact on rail margins, Rail Products, the 270 bps, those 2 pieces, the unplanned production interruption and then the temporary realignment in Mexico. Maybe -- could you maybe just split out the two, what was the impact on the production interruption in Mexico? And maybe what drove those two -- those two unplanned interruption or events? And then just going forward, any thoughts on how we can expect that tank car order mix to impact margins relative to your guidance?

Sure. So first, we are deeply saddened by the tragic loss of one of our colleagues and our thoughts remain with that employee family, friends and the coworkers. The safety of our people is our highest priority. And any workplace fatality is upsetting to everyone at Trinity. Consistent with our prior practices, we have taken steps to reinforce our safety programs and identify opportunities to strengthen our processes. While I won't discuss the specifics of the incident, we remain committed to continuously improving our safety culture and ensuring our employees have the training, resources and support they need to work safely every day. That is the largest portion of the 270. We also had some realignment of work in Mexico. Some of that was related to the tank cars. As we look at going forward, the biggest impact and the reason we're saying we'll be at the lower end of the 5% to 6% is we see a significant increase in deliveries for the second half of the year versus the first half of the year. That operating leverage will allow us to go ahead and regain some of the efficiencies that have been lost earlier in the year. We don't expect a repeat of the incidents from the first half to occur. I think that explains the majority of the $270 million.

Yes. And Andre, I'll just add as you think about the rest of the year, we have very good visibility into the back 2 quarters of the scheduled production. So I don't anticipate -- the guidance range anticipates the tank freight mix, and we don't expect that to really be changing as Jean's referring to the tariffs affecting take car decision-making that really gets into 2027 more so than the back half.

Great. That's great color. And then just on that sort of margin trajectory into the back half with the improvement in deliveries, is there any contemplation of the 3Q versus the 4Q in terms of you thinking that production will ramp sort of more into the year-end? I know last year, margins in manufacturing was actually higher in the third quarter. I don't know if we should be expecting similar in the back half. Just any thoughts there in terms of cadence would be helpful as well.

We're already set to make the production ramp that we need to do. And I wouldn't expect any large swings quarter-to-quarter.

Great. And then maybe just on the FORD, I wanted to switch there because it looked like a nice change in the prior downward trend. It rose to 3.5% this quarter. Maybe just talk about what's driving that and then expectations for that SORD going forward?

Well, all of the metrics that we follow that support that FLRD, the utilization remains high. When you look at the renewal rate, it went up to the Inflation remains high, Material costs continue to rise. All of those give us the headroom to continue to look at raising those lease rates and are supportive of that. A lot of what you saw in Q1 was the mix of car types I think you see a little bit of that in the second quarter, too. So that will impact that rate, but we see headroom on the lease rates going forward.