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

Good morning. I'm Eric Marchetto. And on behalf of the 6,600 men and women of Trinity Industries, I would like to welcome you to our virtual webcast for our 2020 Investor Day. It's unfortunate we have to be here in a virtual format today, but we will have an opportunity to engage with you over the webcast later in the day. And we look forward to engaging with you in person in the future. In addition to myself, you're going to hear from our CEO and President, Jean Savage; then Brian Madison, Executive Vice President of Service Operations; and Gregg Mitchell, Executive Vice President and Chief Commercial Officer. Let me briefly set your expectations for the lineup of our presentation today. 80 minutes of prepared remarks. First, you will hear from Jean. She will speak to the strategy and value proposition of the company. Next, you'll hear from Brian and Gregg and reviewing in more detail of our lease portfolio and our commercial approach. And I'll present an overview of our financial strategy after a short break. We'll then move to a Q&A session. One quick housekeeping item before we begin. If you'll take notice of the screen in your webcast, I will not read this statement to you, but please note, today's presentation does contain forward-looking statements. And I will direct investors to our Form 10-K and our most recent 10-Q for a full description of the company's issues and risks. And now I'd like to turn the presentation over to Jean.

Thank you, Eric, and good morning. I appreciate you taking the time to join us and learn about the changes we're making at Trinity. You may recall that on my third day as CEO, we had our fourth quarter 2019 earnings call. And one of the first questions I was asked was when I'd be ready to present our strategy. Well, we've had a few interruptions with the pandemic and also the need to quickly ensure the safety of our employees, our liquidity and cash flow. It's now 270 days later, and we're excited to share our new strategy with you. Today, we're going to be concentrating on the rail platform. And there are 4 key takeaways I'd like you to leave with today. First, the strong cash generation of our platform through the cycle; second, our plans to optimize the returns potential of the platform; third, the strong financial performance we plan to deliver over the next few years; and fourth, our capital allocation approach to drive value creation. And although not a key takeaway for today, we are excited to begin taking -- talking more about our ESG goals and commitments. We will be publishing our first sustainability report in the first quarter of 2021. On Slide 7, you may ask yourself, why is Trinity such a strong long-term investment for your portfolio? Well, our assets are long-tailed and provide returns through the cycle. Our platform provides us with a cost advantage, tax incentive and commercial leverage. We enjoy significant and compounding cash flow generation as a result of these synergies. Our revised capital allocation framework is focused on shareholder returns and disciplined products and services investment. On Slide 8, those of you who have known Trinity for a while know we have a proud history of being a market leader with high-quality products and services. So why are we changing? Simply said, the former diversified manufacturing company was valued on earnings and backlog as demonstrated in the box on the left. The new Trinity is returns-focused company. One of the key shifts to facilitate this change is moving manufacturing from a key driver to an enabler. Let's take a look at another reason for the shift. The leasing side of our business is much less susceptible to the volatility of the rail equipment industry. Cash flows from leasing enable consistent shareholder returns and allow for disciplined investment through the cycle. Taking a look at the graph at the bottom of the slide, you will note that railcar deliveries, depicted by the brown line, have greater volatility and are leading -- or are a lagging indicator of the economy. A leasing and servicing model, denoted by the bars, is less impacted by the cycle given the diversification of long-duration leases, which result in those resilient cash flows. I'd also like to point out that our leadership team is experienced in dealing with industry cycles, even when the drivers for the cycles are significantly different. As an example, even in the challenging part of the cycle, we are delivering value to our shareholders in the last 12 months ending September 30, 2020. While earnings are challenged by sluggish demand for railcars, as seen by the revenue and margin on the left, our cash flows and shareholder returns have fared well. We have returned over 12% of our market cap to shareholders as of September 30, 2020. This has not happened by accident. Moving on to Slide 11. We've been doing a lot of work since the spinoff of Arcosa in regards to operating cost structure, cost of capital, and capital allocation. These boxes depict the work done since our last Investor Day at the end of 2018. Each of these efforts are critical first steps to improving our future returns through low operating and capital costs. Starting on the upper left, we've removed $110 million of both structural and cyclical costs. In the cyclical cost bucket, 47% of our headcount reduction has contributed to a lot of that reduction. But I want you to know, and you'll hear through our initiatives, that we're in the process of moving a lot of this from the cyclical bucket to the structural bucket. On the commercial side, we've realigned to market sectors to help us understand those customers better and help us solve complex problems that they may have and bring to bear our full platform of services and solutions. We have strong cash flow. We have also had a pretax weighted average cost of capital reduction of 240 basis points. At the same time, we've increased our returns to shareholders by the improvement in our dividends of 46% and by share buybacks. We do believe that, despite some market headwinds, the next 3 years will demonstrate the resiliency of our platform and its great potential to generate meaningful returns for our shareholders. I'm going to share with you our expectations for the next 3 years, and then we'll spend the rest of the time sharing with you how we are going to get there. As you can see, we are not counting on the big industry recovery to drive our financial performance. But rather, we're looking at replacement-level deliveries and what levers management has in its hands to deliver these results. In the past, you've heard Trinity state a goal to double the size of their fleet. We're moving away from that with a more modest fleet growth expectation. Our net investment of $500 million to $600 million in railcars would equate to roughly a couple thousand railcars per year. We see utilization where it is now. And even in a down cycle, we will improve our operating margin to the mid- to high single digits. As we previously have stated, we are targeting mid-teen ROE. Moving to the bottom of the slide. We expect significant cumulative cash flow over the next 3 years of the $1.5 billion to $2 billion. If you combine that with a modest lease fleet investment, we have large amount of cash available for share repurchases, dividends and M&A that may become available. This is why I'm excited, and I believe the next 3 years can highlight the true potential of our platform. Even with little to no North American fleet growth and stable utilization, we will generate significant cash flow for shareholder returns and growth. We also have room to continue to increase our leverage to achieve a 60% to 65% loan to value. Now to make this type of shift in direction quickly and effectively, the management team developed our new operating model and company purpose. We have a strategy, but now we have to execute. This is a one sheet that we can talk and align all of our employees to on how we're going to execute. Starting at the bottom of the slide, our 5 core values -- integrity, diversity and inclusion, commitment, excellence, and innovation -- are foundational to the company, and they support our businesses: leasing, manufacturing, maintenance and services. We align our improvement to these businesses with our 3 broad initiatives: optimization, innovation and customer experience, all with the goal to deliver superior returns to our customers, shareholders and employees with the overarching purpose of delivering goods for the good of all. Let's move to the strategic initiatives on Slide 14. As we develop the plans to achieve these goals, 3 themes emerge: We needed to lower our cost of capital, reduce the effects of the cycle, and improve the overall rail supply chain. The major initiatives that we have defined to help improve our performance fall into 2 categories: Optimization and growth. We'll go into each of these in more detail in a moment. And Eric will touch on the financial impact of these initiatives. In the optimization category, we are focused on our balance sheet, lease fleet and our operations. In the growth category, we are focused mainly on new products and services that provide us with countercyclical benefits that enhance the customer experience and provide a stable base of revenue and margins. Innovation permeates all of the work we're doing, and both Brian and Gregg will expound on this during their presentation. So let's dive into some detail. Post spinoff, Trinity's capital structure reflected a diversified industrial company. The resulting cost of capital did not support the financial assets on our balance sheet. In the last 2 years, we have lowered our weighted average cost of capital by 240 basis points as a result of leveraging our balance sheet to better align with more of a leasing company capital structure. These financings have also come with attractive interest rates. Our most recent deal was priced at a blended average rate of 2.5%. We do expect our weighted average cost of capital will continue to fall as we reach our LTV target ratio of 60% to 65%. Moving on to our leasing portfolio. We have aggressively grown our lease fleet in the last 18 years as we build scale in the leasing business. With our returns focus, we need to more closely examine the railcar assets we hold on our balance sheet based on our own cost of capital versus those that we may want to sell to a railcar investment vehicle partner or other industry participants. As a result of the strategic shift, you will see a much more muted pace of growth in our wholly owned portfolio. We will look to the Trinity rail platform to structure lease transactions that can add value and improve upon the returns of the assets that we own. In the middle, transact and earn, we need to leverage our RIV partners for the secondary market -- or the secondary market to monetize railcars not accretive to our returns. These are railcars that may be in our fleet today or may be originated in the future. For the subset of underutilized railcars in our portfolio, we will look to modify them to service different commodity markets when it makes sense. We expect the combination of these initiatives could improve the full lease portfolio IRR by 25 to 75 basis points. As for our RIV partnership, they are complementary to our lease portfolio as a way to extend our commercial reach and market positioning in a more capital-efficient way. Starting on the left of the slide, once a railcar is in our lease portfolio, owned or managed, it gives us additional opportunity to generate incremental service income through either our maintenance offerings, administrative services, or by growing logistics and data services. Shifting to manufacturing. Trinity is well-known for our manufacturing capabilities and our flexibility to scale with the cycle. But that ability to maximize the peak comes at a cost during the rest of the cycle. We are changing our approach to our operating structure and evaluating where we can put our resources to the highest and best use: lowering our investment by closing and selling properties that don't fit, expanding our lean methodologies throughout the company, and implementing new technologies. We're reducing the cycle amplitude by outsourcing the low value-added fabrication, reducing our hours through efficiency and best practice implementation, and treating our manufacturing and maintenance facilities as an enabler for our business. We're resetting our cost basis, making investment decisions on their impact through an entire cycle. Doing all of this will result in a 30% reduction in the breakeven point for our manufacturing, and a 300 to 550 basis point improvement in our operating margin based off of current volumes and product mix. We all know that you can't cut your way to prosperity, and so we're also looking for growth. Our growth initiatives are focused on products and services that will provide value to our customers, such as reducing supply chain costs, providing railcar visibility, and reduced owning and operating costs. In my experience, new technologies and services sometime take a while to gain widespread acceptance. So we're projecting these initiatives to grow total company EBIT by $150 million to $200 million over the 3 years. Each of the initiatives that we have discussed vary in their stages of development, timing and their associated impact to our returns performance. Some of these initiatives now are ongoing. Some will be started at various points over a 3-year planning period. Collectively, they all build on the power of Trinity's rail platform and centralize on improving our cost structure, minimizing our cyclicality and improving our rail industry supply chain. On Slide 21. The strategic initiatives I've just laid out are major efforts to improve the long-term performance of the business. Some of these initiatives will have an immediate impact on our financial performance. While others may take a bit longer to manifest themselves in our financial results, we do take a long-term look on the sustainable value creation for our shareholders. The 4 metrics you see here, if growing and improving together over time, will measure our performance as a business and, ultimately, whether we're growing shareholder value. We believe these metrics measure our value proposition that I reviewed with you on Slide 7: an attractive railcar asset with long-tailed utility measured by our returns and cash flow; strategic synergies generated by the platform, measured by returns and cash flow; significant and compounding cash flow resulting from platform synergies measured by cash flow; and capital allocation focused on shareholder returns and prudent growth measured by book value per share and dividends. Eric will elaborate more in his section, but let me summarize by saying these optimization efforts, substantial cash flow generation and disciplined capital allocation position Trinity for meaningful value creation through the cycle. I will now turn the presentation over to Brian to discuss the lease portfolio strategy in more detail.

Thank you, Jean. It's terrific to be here today with an opportunity to engage the investor community. As Jean and Eric's sentiments were expressed, I also feel the same way. It will be great to actually do this type of event in person someday in the future. With respect to the lease portfolio, Trinity Rail has an excellent story to share. Today, I'll address railcars as a great investment, Trinity's position as a great asset manager, and the bright future we've been diligently working to create every day. On Slide 23, railcar leasing is a business the company has been building for 40 years. The reasons highlighted on this slide provide a nice synopsis of why we believe so strongly in railcar assets. The bottom line, railcars make attractive long-term investments as lease railcars -- lease railcar assets produce stable and recurring revenue and predictable cash flows. You'll see momentarily that, while we've had growth in the fleet the last few years, there is stability of rental payment cash flow even in a cyclical market downturn like today. Lease railcars are a tax-advantaged investment. For books purposes, we depreciate straight line over 37-plus years. For tax purposes, a railcar asset qualifies for accelerated depreciation. This enhances our capitalization structure and return on equity. We'll discuss that in more detail in Eric's part of the presentation. And railcars are made largely of steel, and in some cases, aluminum. The metal content and purpose of a railcar, that is a low-cost way to move bulk commodities long distances, provides for other compelling considerations of the investment, including positive inflation correlation, low residual value volatility and low risk of technological obsolescence. Also, given the importance of sustainability, it is worth noting that a railcar is nearly fully recyclable. Let's talk a bit more about railcar asset economics, Slide 24. Given the attractive investment attributes of a lease railcar, understanding the expectation for returns performance is also important. Let's look at the graphic on the top right of Page 24. As a result of inflation, railcar lease rents generally increase over their useful life as the productivity of the railcar doesn't change much from its first years in service. That's the yellow line. While normal operating costs, like maintenance expense and interest expense, may move around from year-to-year, over time, the divergence of the inflating rent and the stable cost and the depreciating book value yield a positive change in the returns performance as can be seen in the bottom-right graphic. Looking more closely at the graph on the bottom right, let's consider Trinity's lease fleet, which averages about 10 years old on this time line. This return's performance is on the verge of accelerating when you evaluate the financial performance using GAAP earnings. Given these attributes of a relatively young lease fleet, we evaluate the tail or the lifespan of the cash flow profile of the assets as well as the economic and cash-on-cash returns of the portfolio. Looking to the future, towards the midpoint of the lease railcar asset's life, we expect annual returns to yield mid-teens ROE performance. Simple takeaway here is a lease railcar, GAAP returns improve over time. Beyond comparing railcar lease portfolio attributes, it's also worthwhile to contrast railcar investments to other asset classes. We strongly believe railcar assets outperform other asset investments over a long-term horizon. Notable attributes of investing in railcars: Railcar asset portfolios are granular, thus diversifying risk. Our lease portfolio book value of about $7.5 billion, spread over 105,000 railcars, reflects an average railcar value of approximately $70,000. Obsolescence risk is low for railcars. And the other key attribute is the customer credit profile. Lessee credit quality is strong, and railcar assets are readily remarkable in the event of a default, and thus credit losses are low. Also, when you look at debt funding capability, stable valuations and cash flows yield nice advance rates on loans and securitizations. In fact, our most recent placement was done at a 90% advance rate. As a result of these factors, returns are solid, and they're stable. Based on these attributes, we believe in the current market environment, this is why valuations of railcar assets have fared better than other financial asset classes. Beyond the exceptional asset class attributes, market dynamics are favoring growth of fleet of lease railcars as well. Looking at the dark-blue portion of the bars on the graph at the left on Page 26, you can see that the railcar leasing business has shown significant growth in the last 30 years. This results from structural changes in the market. As Class 1 railroads have allocated more of their capital towards track infrastructure, safety and technology, industrial shippers turn to leasing companies to source their railcar equipment. Since the early '90s, we've seen the ownership landscape of railcars change from just over 50% owned by railroads to over 50% being owned by leasing companies. As a company, Trinity anticipated this trend and made a decision in the early 2000s to shift our business model to focus on providing leasing services to leverage our market position. Since that time, we've taken advantage of this shift in market share and rapidly grown our lease fleet, building a market-leading lessor position. Looking to the future, as you can see on the right-side pie chart, the competitive landscape among leasing companies today is split. It's between those that provide a finance lease and those of us that predominantly provide full-service operating leases. There are several significant players on each side. However, there's still a fair amount of fragmentation within the leasing market. We see that as an opportunity for consolidation or gain share, including acquiring and/or managing fleets for railroads or shippers. Turning to Page 27. Let's shift gears and talk more specifically about Trinity's business. This slide calls out a bit more detail with respect to Trinity Rail's capabilities as an asset manager. Our portfolio is substantial with an owned and partially owned fleet exceeding 105,000 railcars, another 27,000 railcars that we manage on behalf of our investor partners as a recurring source of fee revenue. Given our scale, we have upwards of $2 billion in committed lease revenue. Looking at the top-right graphic, you can see the roughly $700 million to $750 million in recurring revenue there with a nice 40% plus operating margin. Of course, our approach to portfolio management, which we'll discuss in more detail in the next few slides, that is an effective distribution of lease terms, not going too deep with one customer, diversifying the types of railcars in the portfolio, and of course, considerate management of industry concentrations, this all ensures that we don't have too much revenue at risk of expiring in any given year. It's usually in the range of 15% to 20%. The bottom-right chart provides a sense of the future exploration profile and the range of the majority of average monthly lease rental rates in our portfolio. As you can see, there aren't any significant swings resulting in a very manageable renewal profile. Going forward, we're introducing a new metric to help investors get a sense of the impact of quarterly lease rate changes on our portfolio. That's the rectangle that's surrounded by the blue dotted line on the page. We're calling the metric, the future lease rate differential. It compares the most recent average of our lease rates to our average expiring lease rates over the next 12 months. We want investors to understand the impact of the future lease rate differential as the diversification of the exploration schedule minimizes the impact of rate volatility on the portfolio. Therefore, we expect that a future lease rate differential of a negative 21% would yield a 2% headwind to segment revenue in the coming year if market conditions persist. The math there is 15% of the portfolio expiring times 0.21, that's the negative 21%, equals about a 3% figure, 3.2%, and with the midyear effect of about 1.5% to 1.6% as we look to the future. We've rounded up to 2% for this slide. Excited to be able to share this as an ongoing metric that we'll provide our investors. On this page, I'll quickly call out that the platform enables us to do an excellent job at managing our assets through railcar cycles over the years. When looking at our last 10 years of performance, we maintained very healthy utilization by working with our customers and striving to deliver the premier service for the lease rates they pay as we balance lease rate and term by negotiating longer lease terms during strong market cycles and then shortening lease term on assets during market downturns when the pricing isn't so favorable. Our great service also allows us to create stickier relationships. We've got a 74% renewal rate. As you look back over time, this keeps asset utilization high. The combined effect is a balance portfolio with nominal exposure to renewals in any given year. Our average remaining lease term of 3.4 years implies a roughly 6- to 7-year turn on our portfolio. Slide 29. Many of you have seen this chart before, so I won't review it in detail today. Just to say, given the broad product offering that Trinity rails offered shippers throughout the years, we've built a diversified portfolio of assets across railcar designs and the end markets they serve. While our portfolio is a little more weighted to industrialized market sectors versus, let's say, consumer-oriented, there's good fungibility within the end markets that these railcar types serve. When you look at the number of units and the book value of the assets, we have a well-diversified portfolio. Slide 30 further highlights that our railcar service customers with strong credit profiles. Our lease portfolio services over 700 customers with the largest customers representing only 5% -- largest customer, representing only 5% of lease revenue. Our targeted leasing companies, that is primarily industrial shippers, generally have significant supply chain operations, thus fairly significant financial wherewithal to maintain their obligations. Over 50% of our customers are investment-grade or private companies that we rate comparable to investment grade. Railcar assets are capable of serving multiple customers and markets. That's the readily remarketable customer default. So as a result, we have a very low writeoff experience within our portfolio. Beyond the solid asset class we finance and our stable financial performance resulting from effective asset management, we've been investing to position Trinity Rail as a peerless market leader in a number of other ways as well. As we turn to Slide 31, having achieved critical mass and stable recurring lease revenues, we're now looking forward to a future of optimization on behalf of our shareholders and our customers. Our disciplined operating model is being refined. As noted by Jean, given our focus on lease fleet returns, we'll moderate the lease fleet investments and transact new railcar deals that are accretive, that is above our weighted average cost of capital, thus, new deals will help improve overall returns. In addition, to give us greater control of our cost, quality and turn times, we're seeking the shop that has maintained over half of our railcars and Trinity-owned facilities. This improves relationship profitability and greatly enhances customer satisfaction and loyalty. With respect to innovation and going digital, our capabilities-as-a-service provider are industry-leading. Through a digital channel, customers can now transact and engage with us anywhere, anytime, any device. I'm proud to say that we offer a frictionless interaction with Trinity Rail, which makes customers happy and reduces our cost to serve. We're also in the process of greatly expanding our Internet of Things options with devices and sensors on railcars to provide shippers with insights needed to help bring modal share back to the rails. Enabling our operating model and innovation is a strong data and analytics competency to deliver customer solutions that drive greater supply chain efficiency. We do this with a keen focus on building state-of-the-art systems and processes leveraging our artificial intelligence, machine learning and other technologies. Looking at rail services from a broad lens, we see $20 billion to $25 billion in total available market to pursue as we seek to expand existing and future capabilities. Of course, while the addressable market is big, we're in the beginning setting modest growth expectations. Given these competencies, we see further potential to scale the business and enhance our customer proposition with partnerships and alliances or tuck-in acquisitions of complementary services solutions, further expansion of the maintenance network, and we're keeping a keen eye out for consolidation opportunities as well. In closing, looking at our business from past to present, we've been driving to scale the leasing business through increasing the portfolio and shifting our operating behaviors to focus more on returns will be moderating growth of the platform. Thus, given that new business must be accretive to weighted average cost of capital and the current market environment, our outlook would be for future compound growth rates to be under 4%, even less than that for wholly owned assets, as we'll continue our transact and earn and railcar investment vehicle strategy, and that compares to the 13% growth that you see noted in the earlier periods on the slide. At the same time, our innovation efforts will focus on adding new services capabilities that will be accretive to return to services generally attract nice margins and require nominal capital. We expect future scale will be driven more by these services capabilities that enhance the overall attractiveness of the portfolio. To sum it all up, we operate in a great asset class. Trinity Rail is a great asset manager, and we see a very bright future for our business. I appreciate the opportunity to share today. Now I'd like to welcome our Chief Commercial Officer, Gregg Mitchell, to discuss our commercial market strategy.

Thank you, Brian. Beginning with Slide 34, I'd like to discuss 3 key areas. I want to talk about the markets we serve. I want to share some insights on our platform and the value it offers in differentiation. I want to share with you our focus on improving rail supply chain efficiency. Railcars are an integral and valuable part of the North American supply chain. After truck, it's the largest mode of transportation for goods and commodities. But compared to truck, rail is more economical and environmentally friendly as a mode of transportation. Jean mentioned earlier our commitment to sustainability and our focus to help improve the rail supply chain. According to the American Association of Railroads, on average, U.S. railroads move 1 ton of freight more than 470 miles on a single gallon of fuel. If 25% of the truck traffic traveling at least 750 miles moved by rail instead, annual greenhouse gas emissions could fall by approximately 13.1 million tons. So what's 13.1 million tons? It's the equivalent of taking 2.6 million cars off the highway system in the nation each year, or better said or otherwise said, the equivalent of planting nearly 200 million trees. The rail industry does make a difference. It's our opinion that your view of the GDP should directionally shape your view on the rail industry, as seen in the graph below, as railcar loadings and GDP have a very strong correlation with each other. It's often been quoted and you can see why. Warren Buffett states that if he could only use a single market indicator to determine the health of the economy, he would use weekly railcar loadings. We all understand that our economy is driven by numerous market sectors that generally have different demand drivers. This holds true with the railcar industry. We've mentioned many times there is not one railcar market, but many markets of railcars. We view our commercial landscape in these 5 major markets that we're presenting here. Each market includes several major commodity sectors, each typically with distinct drivers that influence long-term and near-term trends. For example, the performance of the energy and the agriculture markets have been dramatically different over the last several months. While stay-at-home orders depress the demand for energy, it makes sense that demand for food and grains accelerated the agriculture market during the COVID pandemic. As you see here, railcar ownership and traffic are generally evenly split. In any given year or given cycle, one of these markets can be the primary headwind or tailwind for the industry, therefore, requiring that we understand varying demand drivers for each of these groups. Taking a look at Slide 36. As we look out at the current market environment and what opportunities we see for railcar demand, there remains a level of uncertainty given the trajectory of the market recovery following the COVID-19 pandemic. However, we believe that our platform gives us a unique, holistic view to inform our business to better prepare for the future market dynamics. Let's start with the left side of this chart. It provides a little closer look at railcar loadings for the last 4 quarters and some relative view on what we anticipate in 2021. It goes without saying that recent railcar loadings have been directly affected by COVID. And in 2021, we do see the potential for them to slowly improve. As you look to the right portion of the chart, it's evident that railcar loadings have a direct effect on market pricing. Over the course of this year, lease rates have been challenged across the board, as you can see. This should be no surprise as various lessors have talked about lease rate challenges in 2020, following the severe declines in loadings. However, based on trends we've seen in recent months, such as some railcars coming out of storage, along with improvements in railcar loadings, we anticipate that these lease rates would slowly follow in many cases. Lease rate recovery in some markets will lag the broader recovery due to the supply of railcars in those particular areas. We have a disciplined approach to managing our exposure of our lease renewals from year to year, and our teams have done a great job in managing the expected future cash flows of our leasing business so that any given year is not subject to major repricing hurdles. Within the supply chain, Trinity serves more than 700 customers that include industrial shippers, leasing companies and railroads. Our equipment offering is still the broadest in the market. Each of our customers has unique challenges. The breadth of our platform provides complementary products and services which enables us to design solutions to our customer-specific needs. Our ability to offer railcars through both a direct sale option or a lease arrangement is critical to our success. Leasing railcars provides constant touch points with customers that enables us to better understand their business needs. As we have grown our leasing company, more and more of our commercial transactions are done through our existing portfolio of railcars. It's important we maintain the utilization of these railcars to protect the returns on the residual value of the investment we've made in our fleet. The biggest commercial benefit comes when a customer has a complex or large-scale transaction, which truly differentiates Trinity as a single source solution. These commercial wins generally come with premium value. While I don't go into them here, we do have some examples in the appendix of some of these large-scale transactions that we would ask that you review. Slide 38. There's a lot of players in our industry. Competitors compete with us in different pieces of the market, and Slide 38 shows what we do and how we're different. We sell and lease railcars. We build railcars. We maintain and administer railcars, and we support the efficient use of railcars with services. Trinity's rail platform provides differentiated value propositions for our customers as part of our goal to drive more modal share back to the industry. We want to improve rail supply chain efficiency. Our platform is built around a premier product, and we drive the value of that product through additional unparalleled service offerings and solutions. All combined, our platform benefits our customers' supply chain investments by supporting their asset utilization and ultimately, their working capital. As we've stated, we are committed to improve rail modal share. We believe that shippers demand, and we hear them say it routinely, more real-time information than what they receive today. Supply chains in North America are evolving as our customers continue to look for ways to improve railcar efficiency. The rail industry has been slow to innovate at the pace of the trucking industry. And as a leader, we are implementing a program in 2021 designed to improve the customer's rail experience through GPS telematics and data analytics. This effort centers on improving rail shipment reliability and predictability. In addition, we've partnered with other industry leaders to form a coalition called RailPulse. This coalition stands to develop and deliver industry-wide systems-based standards and infrastructure for railcar telematics. Building this capability will improve rail safety and efficiency throughout the rail network in North America. When you combine both of these significant innovative programs, it confirms our commitment to our customers' rail experience. And finally, as Jean stated earlier, we are moving toward a more innovative culture. Our platform provides us a tremendous number of customer feedback touch points. Through the voice of customer, we can better identify our customers' supply chain needs, not only with the use of our existing products and services but with products and services that we could be offering. Our platform enables us to capture ideas, identify customer solution opportunities and determine where we should invest in new, competitive, high-yield products and services. We're interested in growing our platform through opportunities that increase the interest in our existing assets or the need to build new cars. By deepening our engagement with our customers, defining the right value propositions, we have the opportunity to build greater returns and bring more modal share back to our industry. With that, we'll take a short break. And when we return, we'll hear from Eric Marchetto, our Executive Vice President and Chief Financial Officer, who will speak to our financial strategy and our outlook. So let's take a break and please plan to return to this meeting in about 10 minutes here or straight up 10:00 Eastern Time, 9:00 Central. And with that, we will return in a few moments. Thank you. [Break]

I'm excited to discuss the business with you today. Jean began the presentation with Trinity's value proposition and why we believe it's a compelling story. The railcars we own are part of a differentiated platform, which creates solid cash flow. This cash flow is put through a disciplined capital allocation lens to determine the most accretive options. This should allow our platform to grow and creates shareholder value. If you'll turn to Slide 43, I'd like to discuss our value proposition from the viewpoint of sustainable capital, a unique Trinity advantage. There are 4 financial aspects of our business I want to emphasize. We do this over the long term, steady cash flow that essentially compounds over the life of the railcar asset on Trinity's platform. We originate railcar assets that have attractive risk-adjusted returns. We have synergies that you've heard about today that increase the attractiveness of the railcars, which create a steady cash flow that we then have the option to either reinvest or return capital. With that framework in mind, let's walk through each one, and then I'll wrap up with a long-term outlook for the business and how that will inform our capital allocation strategy. Let's start with attractive yielding assets on Slide 44. You heard from Jean and Brian about the stability and long-tailed utility of our railcar assets. I'd like to draw a clear distinction between the economic performance of our portfolio of railcars and our primary return metric, return on equity. We have established that the assets have stable cash flows given the long-term leases that protect lease rents from volatility in the market. Sometimes this is good and there are times we wish we can remarket every year. Brian also discussed the fact that the utility of the asset does not change much with age, which allows for inflation of rents over time relative to its declining book value. If you look at the graph on the bottom right, you can see the average economic performance of our investments versus how GAAP accounting represents returns on equity on an annual basis. The hash line represents our long-term investment thesis and reflects a weighted average of the lifetime annual GAAP returns. We believe that this view effectively translate GAAP returns to true economic returns. The solid line represents how GAAP accounting reflects these annual returns in the financial statements over the life of the asset. Note that the GAAP approach is lumpy relative to the stability of cash flows and actual performance of the assets by penalizing railcar investments in the early stages of their long service lives on account of comparatively higher book values. In any given period, the annual GAAP returns and cash returns will be different. The point is, we like the returns of the assets over the life of the investment. Now let's turn to Slide 45 and talk about the advantages of our platform and how it delivers superior shareholder value versus other business models. We're often asked by investors how to quantify the synergies of the combined leasing and manufacturing business into a single business platform. By now, you should be noticing some pretty sizable numbers on this page. Generally speaking, the synergies from the platform primarily are cash flow synergies and not always reflected in the income statement. For discussion purposes, we are showing cumulative benefits over the last 5 years, which gives you a good sense of value creation over a cycle. Let's start with the financial synergies on the top half of the diamond, which are worth more than $1 billion in cash flow synergies over the last 5 years. At the top, we drive a significant investment advantage by direct sourcing the railcars from our manufacturing business. The cost advantage represents our investment savings by not having to pay another builder a margin for the railcar. Moving to the middle, there is a significant cash tax advantage to running the business the way we do. As we've discussed, railcar assets have attractive tax attributes that reduce our cash taxes with a tax life that is much shorter than its economic life. Our platform is much more tax efficient versus other competitors, effectively sheltering our manufacturing earnings from cash taxes. Then as we look at commercial synergies and some of the initiatives that Jean spoke to, we see significant value opportunity in our platform. Moving through the diamond, as you heard from Gregg, as you may see from some of the case studies provided in the appendix, we believe we have a unique advantage in certain complex or large transactions that many other providers cannot match. On the whole, we've seen $4 billion in these types of sales over the past 5 years and they generally come with attractive margins. Finishing on the bottom end of the diamond, the integrated commercial and portfolio management functions in our platform position Trinity's fleet for low-risk organic growth based on market demand that meets our return hurdles. These fleet additions, through our hold and earn, our RIV platform, have generated an incremental $500 million in profit over the last 5 years. Most lessors have to place speculative orders or grow through secondary market acquisitions. These methods of growth are typically more expensive and may present more risk. To sum it up, while there are a number of intangible synergies that we also believe create a lot of value, the tangible financial and commercial synergy of the platform have generated several billion dollars' worth of cash flow synergies for shareholders over the last 5 years. To review so far, we own assets with stable cash flows and we have a platform that generates unique incremental value through synergies. That leads us to Slide 46 and how the combination of these elements drive our overall cash flows. Now before I speak to this slide, let me note that these data points and incremental disclosures on cash flow are very dense but the direct result of your feedback from the investor perception study we ran earlier this year. So with that as a backdrop, let's start on the left side of the page, which is our view of steady state cash flow, which investors wanted to better understand. I'm not going to read the definitions on this page. These metrics are reconciled for you in the appendix. The key is that this metric measures Trinity's potential capital available for deployment after reinvesting in the business to keep our enterprise earning assets stable. Of note, steady state cash flows would generate $354 million a year on average over the past 5 years. This is potential cash flow to put through a capital allocation process and grow or return it. To take that view to another level, on the right side of the page, we are presenting an evolved view of free cash flow, which takes into account our capital allocation decisions in managing our cash flows. We've evolved our definition of free cash flow to move beyond our lease fleet investment to give investors a clear sense of excess cash. Our view is excess cash is the amount we have available after investment in both maintenance and growth areas of the business, leveraged our new lease fleet growth and paid our current dividend. The key to moving beyond lease fleet investment with the free cash flow definition is to appropriately capture Trinity's equity capital required to invest in the lease fleet given the leverage we can utilize to enhance our returns. We call this equity CapEx and is similar to other terms used by equipment finance companies. I want to also quickly point out in this 5-year trended view of total free cash flow that prior to the spin, at the end of 2018, Trinity managed our balance sheet under our former operating model of the manufacturing company. Going forward, you should expect that our lease fleet investment will be appropriately capitalized to focus on the returns of the business. Part of our transition from earnings-focused to returns-focused will solve this going forward. Clearly, this is a meaty page, so before I move on, let me summarize the takeaways. First, let me redirect your attention back to the chart on the left, which shows our historical operating and steady cash flow. On average, $561 million and $354 million, respectively, over the past 5 years. The takeaway here is this business generates a lot of cash before our growth investments in the rail fleet. Now on the right side, this view of historical free cash flow is again after our investment in rail fleet growth, which we noted has been elevated in recent years. Even after that level of investment, $163 million on average is a lot of excess cash as you can see. Bottom line, there will be even more cash at our disposal due to the moderation of lease fleet investment, and in a few pages, we'll detail how we will deploy it to drive shareholder returns. On the point of value, I'll be brief here, but we put these pages together to show Trinity's history in value creation as defined by book value growth and our cumulative dividends over the past 5 years. First, please note that this chart has been adjusted for the Arcosa dividend and our spin in 2018. As you can see over this time period, Trinity has grown significantly at a compounded annual growth rate of nearly 13%. Clearly, we have demonstrated our ability to grow our business while returning capital to shareholders. Now if we turn to Slide 48, you can see that we've overlaid our index stock price, which shows that there has been a significant divergence from the trend line I just referenced. I'm not going to speculate on exactly why that divergence exists and leave that to our investors and analysts. But I will say the following: first, while we have a high conviction in Trinity's ability to generate steady free cash flow through the cycle, we also note that our GAAP returns matter and have been a source of pushback on our story in the past. Today, we'd like to be clear that we acknowledge both. One, we clearly maintain the stability in our cash flows. And we believe we can create value through a more disciplined capital allocation approach, which you've heard from many of us today. But incremental to that, two, that we have initiatives and a plan in place to improve our GAAP returns because they are important to existing and new shareholders. From our standpoint, management has a view that the path to improve our return on equity is within our control. This belief underscores our view that Trinity's stock is undervalued. How will we measure the creation of long-term shareholder value? To review, these are the KPIs Jean presented for measuring the long-term performance of our value proposition. We feel for our type of business and the assets we own that improvement in the combination of these KPIs will lead to sustainable, long-term value creation. What I really like in these measures is they are relatively easy for us to report and you can calculate from our financial statements. While in any given year one of these KPIs can outperform the other based on our decisions or the market, over the long term, improvement in these KPIs is a good indicator that we are making the right decisions. So with that level set on our value proposition, let's turn to Slide 50 and review some of the key optimization and growth initiatives Jean highlighted earlier focused on how they improve our return on equity. These levers are in our control. Financial initiatives is a combination of recapitalization of the balance sheet, which gets us to the current goal of 60% to 65% loan-to-value and returning capital to shareholders in the form of dividends and share buybacks, which is demonstrated by the light blue color. We believe this will add 400 to 500 basis points of improvement to the returns over the period. The realization of the decisions that we have made to date and the further efforts to reduce our costs and lower our breakeven point, along with the portfolio work we are doing to ensure we are holding the right assets on our book, will also enhance our returns by a similar amount, which is in the middle blue. Finally, sorry, in the dark blue, an important element is we have the ability to continue to grow. We expect there will be business development and product, service expansion that we expect to add 200 to 300 basis points of return on equity improvement. The key highlight to take away is that even in a more normalized replacement cycle that we expect to see over the next few years, we do believe the ability to improve our returns is well within our control, and we're not counting on the market to be a tailwind for improved performance. Optimizing our balance sheet and our operating structure position the company for further acceleration in the future. We are focused on our return on equity goal and we're also focused on a more disciplined capital allocation framework. First, I'll begin on Slide 51, with our plan in the near term. While the railcar industry can be quite cyclical, our cash flow from operations do have countercyclical benefits from the unwind of working capital. We expect to generate very healthy cash flow from operations over the next 3 years. We expect to receive large tax refunds, $485 million over the next 4 to 6 quarters. $60 million of that has been received in the current quarter. We also plan to continue optimizing our balance sheet to more appropriate levels for our type of business. When you consider the capital allocation impact of maintaining the dividend and significantly slowing the amount of capital invested in leasing company, we expect a fairly large amount of capital to deploy over the coming years. We look to deploy that capital in the most accretive way to drive shareholder value. If we then turn to Slide 52, let me talk a little about how our capital allocation philosophy will shift longer term. Upon optimizing our balance sheet, our business will operate under a more appropriate capital structure for the type of business that we have become. And our capital allocation framework will shift to more programmatic and opportunistic return of capital to shareholders. At that point, excess cash flow can be evaluated to further dividend growth. Regardless of the time frame we achieve an optimized capital structure, it is important that we deploy capital in a returns-accretive approach to create value for our shareholders. I'm not aware of many companies who can achieve this level of cash flow generation relative to the size of their business at this point in the cycle. But we believe Trinity has a differentiated value proposition for shareholders because of our platform. We are committed to managing the business to increase our cash flow generation over time, deliver superior risk-adjusted returns through the cycle, all the while delivering high-quality products and services that drive the rail industry's modal advantage. As we close out the presentation today, I want to remind you of some of the business planning assumptions Jean presented earlier and summarize why we believe Trinity is a good investment today. We believe Trinity is in a unique company-specific position to deliver shareholder value for the amount of cash generation we expect over the next 3 years. While we see the market improving to a more steady normalized market, with demand levels reflective of a replacement market, we believe investors should take notice of the amount of cash flow from operations and the additional liquidity that will come from increasing our leverage. With the current fleet size and the planned additions, we see additional liquidity from the balance sheet optimization of up to $450 million over the next 3 years. Based on our strategic initiatives, we believe we will be enhancing shareholder value through prudent deployment of a significant amount of capital while further positioning the company for accelerated financial performance when the market inflects in an up cycle. In a moment, we'll move to the Q&A session, where you'll have the opportunity to hear from more of our management team. Bringing this all together, if there's one slide that I would like you to use in your review of our key themes today from today's presentation, it's this one. I want to summarize the 4 key themes you heard from Jean at the beginning of this presentation, which have played through each of our discussions. We expect to generate strong cash flow, $1.5 billion to $2 billion. We are focused on optimizing the returns of the platform to a mid-teens return on equity. We aim to deliver strong financial performance. We are committed to prudently deploy capital into the highest return opportunities to drive shareholder value. When you consider these takeaways, I strongly believe Trinity is poised to deliver goods for the good of all, for the good of our customers, our employees and also to you, our shareholders and potential new investors. Thank you, and we'll take a short break to set up for our Q&A session. [Break]

Welcome back, everyone. I'll be the moderator for our question-and-answer session this morning. We did receive a few questions over the break so we're ready to get going. Before jumping in, just want to make a special request. While we'll do our best to answer your questions as directly as possible, given the medium, sometimes things get lost in the translation. So we may need further clarification if we don't hit the mark on your question. Please be understanding and feel free to go ahead and resubmit the question through the online tool. Here's our first question. Can you give us some more background on the process and planning that went into developing the strategy you're presenting today?

Sure, Brian. I'll take that. So when we started the strategy, it was actually at the spin-off of Arcosa and the team started to work on optimization. When I came in earlier this year, we took a fresh look and we solidified our belief that we should be focusing on returns and cash flow versus earnings and scaling. With that lens, we then had to go evaluate each of our businesses to determine where they were on their returns focus. We saw that we had opportunities to improve every area across our platform, and we came up with plans and initiatives that would help us do that. Because there was so much change that we were looking at for the company, we then came up with an operating model that I shared with you and also our purpose, so we have a North Star for our employees as we try to move them or shift their way of working and their way of thinking. After that, you all helped us a lot. We did the perception study. And the feedback we got affirmed where we were heading, so thank you very much for that. We then took it to the Board and got full alignment on the new strategy. We didn't wait for this Investor Day to start implementing that strategy. We have been doing work. But I do want to tell you that when we look at this, we know our platform is not optimized yet. We've made good progress. We have more to do. Because of the progress we're making, we're taking these actions no matter where we are in the cycle, and we believe we can have a positive impact no matter where we are in the cycle.

Okay. Next question. Can you spend more time speaking to the benefit of the combined leasing and manufacturing business? You mentioned a number of synergies. I was hoping you can provide more detail.

Well, I'll go ahead and start on this and then I'll turn it over to Gregg and to Eric to give you some more details. First, I'm really proud of our company. They put the customer in the center of everything we do. So when we look at the benefits of our platform, we can solve some of those complex problems that the customer has by using products and services we already have in our platform or we can develop new ones. For the shareholders, Eric did a great job going through the synergies that we see from combining those 2 platforms. And we believe that as we continue the optimization, we'll see even better shareholder returns coming out to you. If we look at what we've already done, we've been working on the supply chain and optimizing the operations, putting them in an enabler role instead of a driver role. We're optimizing our balance sheet and we're also changing that capital allocation model. All those 3 things, I think, are accretive to our returns to the shareholders. Gregg?

Yes. I'll speak commercially. I think when we look at combining the rail manufacturing and the leasing, it even goes beyond that. Large and complex deals give us an opportunity to really leverage what we've got in our platform, where we can explore listening to the customer, look at some of the opportunities that they have within their needs and then leverage our platform to develop a solution that really delivers a customized method of getting to what they're trying to get to. I mentioned in my presentation that we had laid in some case studies in the appendix. There's 4 that are presented to you for you to read. I hope you do because they're great examples of large complex deals that we work with some key customers. I would point your attention, I believe it's Slide 69, where we engaged with an RIV investor who was really looking to put their money into purchasing railcar assets. But they were looking for a long-term stable return on that investment. But they didn't have the capability really to market and get the cars into the market, let alone manage the maintenance, manage the services associated with the administration of it. So we took that opportunity to put together an entire solution that captured every part of our platform to help that customer market those cars and build that return. As a matter of fact, this deal holistically was about a $210 million added value over the course of 10 years. And this is where Trinity is good. This is where we're strong, listening to the customer, developing that strategic partnership and then delivering a solution that only Trinity can.

Yes. I'll just add further that the RIV example that Gregg mentioned, that's a 10-year case study. And that partner is still with us, so that's something we're very proud of. I'd like to refer back to Slide 43 and just kind of talk a little bit more, go in a little more detail and really because I think this slide was the intent of trying to answer this specific question. And so I'll just walk through a little bit more about it. Leasing does require a lot of capital upfront but we think we have an investment advantage. These assets provide attractive risk-adjusted returns or cash flows. And our model helps solve complex customer issues. If someone wants to buy, someone wants to lease, a combination of both, they make strong earnings contribution. And there's a, I don't know which page it is, but in the appendix there's a page that's single railcar economics, that's kind of an illustrative view of that, and I'd encourage investors to look at that. That's where we're trying to quantify many of the benefits on this page in a real-life example of what happens.

Next question we have. Can you explain what you mean by compounding of cash flows in your model?

Sounds like a great one for you, Eric.

Sounds like an Eric question.

Compounding cash flow. Yes. So I kind of said a little bit of it in my last answer, but I guess I'll repeat some of it. What we mean by lease intake -- when you invest in a railcar, it's a capital outlay at the beginning. And as I mentioned, those single car economic, kind of -- as I think about that in my head, I'll walk through that. You invest in a railcar, you finance the railcar. We invest in it at cost. So that alone has an advantage. We're able to finance it. Brian mentioned our last financing, which structured up to a 90% advance rate. That's on the market value of the car, not our cost for the car. So we think that's a real advantage there. The cash flows are steady. Cash flows, generally very good credits. And so that's where we like that. And then as that pays down, and hope these are long lived assets, there's a built-in inherent inflation edge. Brian mentioned the utility of those assets don't change much. So a 20-year-old railcar and a new railcar has similar utility. Thus, the rents aren't that much different in a 20-year-old railcar and any 1-year old railcar. So over time, as we pay down debt, as we generate our cash flow, there's another refinancing event, and that's a liquidity event for us. And with those liquidity events, that's another opportunity to put it through our capital allocation process and invest in another asset or return it to shareholders or invest it in M&A. So that's really when we talk about the compounding of the cash flows, that's what we're trying to demonstrate.

Yes. And I'd just add one other small comment to that, which is the extent that we have financed through a railcar investment vehicle. We get the ongoing continuous growth of the revenue stream from the fee income.

That's a great point.

Next question is, how would another shutdown of the U.S. economy impact your 3-year outlook?

So on that one, I'm going to start and ask Gregg if he'll jump in there. So when you look at our model, we have an extremely strong cash flow generation and it's countercyclical cash flows. We don't know what another shutdown would mean for us. There are so many different variables of what that could do to the economy over time. But we do know that most of the initiatives that we have in place are initiatives that we have the levers in our control to go ahead and enact. It may then take longer for us to be able to see the financial results flow through, but we would continue on the path that we have set out.

Yes. When you think economic recovery, it's obvious that it's very uncertain. And as we look out to railcar demand, we look at ongoing demand, we're looking at a very uncertain market. As long as there's railcars in storage, and as long as railcar loadings are challenged with the economic environment, those are 2 key factors that help us really pay attention to what could be forthcoming. But again, everything is very uncertain right now. Statistically, 75% is estimated fleet utilization in North America today, which means that about 450,000 cars are in storage. But we are seeing that begin to improve. When you look back at the summer time frame, really in the heat of the COVID impact earlier this year, we saw that more around 500,000 cars. So we have seen some improvements of cars coming back into the marketplace, a good sign. With railcar loadings, railcar loadings, we are beginning to see some modest improvements in that. As you look year-to-date, we've even seen some pretty positive activity in the last 8 weeks, particularly in the intermodal category, where we're seeing some very positive momentum begin to happen. But at the same time, railcar loadings are a very important factor for us, and we'll continue to pay attention to that. But the market at this point is very uncertain.

Let me just add. When you think about a shutdown, that's -- I refer everyone back to the earnings supplemental materials that we've put out with our last 3 earnings calls. Those had a base case and a stress case. With the news of this week and potentially other shutdowns, maybe it's focused more on schools, et cetera, that's where we would look back to our base case and our stress case. As we talked about on our last call, we've been operating more in our base case scenario. But in that stress case, it's refocused on liquidity. And we've continued to focus on preserving our liquidity and expanding our liquidity. And that's part of it -- part of it, as we've always said, is we need people to get back to work and start traveling again, and shutdowns will cause some of that to pause. As I think about that in connection with our 3-year operating plan that we've get out -- have out there, that's -- it's basically replacement levels over that 3-year period. That does imply improvement from today's levels because today, order activity is not really at replacement level. But -- so additional shutdowns could impact the timing of that. But it remains to be seen if it were going to impact our 3-year outlook. Right now, I don't -- I think I feel good about our 3-year outlook.

Okay. Next question. Can you clarify if the 3-year operating cash flow guidance of $1.5 billion to $2 billion includes the $485 million tax refund?

Eric?

Yes. I guess we talked about $485 million enough. We need to -- so let's think about that. So the $485 million is what's on our balance sheet with our third quarter results. That's a receivable related to 3 tax years: 2018, 2019 and 2020. The tax law allows us to carry back any net operating losses from each of those years up to 5 years. As I mentioned, you may have caught in my comments, we have received $60 million in the current quarter. That's related to the 2018 tax year refund. So the refunds that are remaining are 2019, which has been filed; and our 2020, which we won't file until next year. Right now, we would have expected -- by the way returns happen, we would have expected that the 2019 tax refund would be received in 2020. We haven't received it yet, but that's what's baked into our plan. When we release our 10-K, our year-end results, that's when everything -- right now, our 2020 refund on the third quarter numbers is an estimate for the year. So we won't know that final year -- final balance until we file our 10-K and estimated at that point. And we'll also, at that time, know, if we did in fact receive our 2019 refund. A lot of years, a lot of numbers. Sorry, I hope that -- hopefully, that makes sense. It makes sense to you, then I guess we'll make some -- okay.

Okay. Next question. Can you elaborate on what you mean by targeting a more concentrated manufacturing footprint?

Sure. When we're looking at our manufacturing footprint, we've already done some moves on where we're producing our products. We're going to where we can produce the lowest cost, and we also have to take in the complexity that goes in there. We're selling some of the facilities that we don't have a use for, that don't fit in anymore. Some of those have been nonoperational for a while. The other thing that we're looking at, and when we're talking about concentrating is, we don't have to do everything in our 4 walls. So we're depending on supply base that has other customers that could help them go through a cycle much easier. So when we talk about the low value add fabrications going outside, that opens up floor space for us, that if we need to increase our production for a given year, we've got the floor space. We don't have to bring as many people back to perform the same amount of work. So that will lower the variability and cyclicality in our manufacturing plants. So we're really making sure that all of our facilities are an enabler for a lease fleet, so they're in the right place to perform either maintenance or produce product for our lease fleet and then for third parties. And then we're going to make sure that they are earning against their cost of capital. And hopefully, that gives them a little bit of an answer. I can go into a lot of detail there, but I think that's good.

That's great, Jean. this next one, lease fleet growth doesn't appear to be a goal in itself any longer. Is there an ideal average lease fleet age you're targeting you want to be more in line with some of your operating lessor or peers?

Well, we said we're going to grow the lease fleet, but at a modest pace for doing that. And then I'm going to throw that back down to you, Brian.

I think the simple way to put it is that, as the portfolio ages, it's naturally going to be go out in longer term especially as we slowed the growth down. We absolutely see long-term growth. There's no issues with that, even with secondary market additions, incremental managed fleets, things like that, that we'll be bringing in, just happens to be that we're going to make sure that we manage anything that comes in to meet the growth -- the return -- well, the return hurdles, in particular, to meet the return hurdles that we've established.

Yes. I'd just add that we have been -- we have had a very young fleet over -- as we built up our fleet, which -- because of the fleet, all the fleet growth that keeps the averages down. But averages are averages. We do have older railcars. And we're certainly comfortable as we slow the growth of our fleet and our fleet naturally ages. But that's okay, and we will manage those railcars and keep them out there. And as I mentioned, the utility of an older railcar isn't that much different. We have a very modern fleet right now with -- and so we're prepared to let that fleet age a little bit. I don't think we have an age goal though.

No, I wouldn't describe it that way.

I would say we don't have an age goal.

We got to return to goal.

Right. Right.

The next question. Freight markets are experiencing a strong recovery right now. But it is driven in large part by inventory replenishment, which for rail has translated to intermodal strength. Can you talk about your exposure to intermodal?

Gregg?

Yes. So intermodal, we have seen in recent weeks, we have seen some activity begin in railcar loadings begin to tick up. And if I'm accurate in saying this, it's about -- the last 8 weeks, we've seen all of rail traffic tick up, I'm actually above 2019 numbers. Understanding that 2019 was not the best year, and that rail tick-up in comparison to last year is really driven by intermodal, which I think is up between 8% and 10% week-over-week compared to last year. So that's some positive activity. I also understand that about 22% of the vehicles used in intermodal are still in storage. So there's a pull from storage possibility happening here. But we will always look and really stay engaged with our customers to understand what the opportunities are for us to expand our fleet in this category. It's not always a high-value type of equipment for that, but we also look at the opportunities with some of the innovation that we have working now to be able to offer some connectivity to those vehicles in an innovative way, to make them more reliable and more efficient as a part of the entire North American process. So there's a lot of things we're thinking about relative to what the opportunities are, particularly in this market where things can be attractive. But we're going to do it when it makes financial sense and returns for our business and do the right thing.

Great. Eric?

Yes, let me add one thing on intermodal. We -- in intermodal, we're going to -- the way we approach the intermodal market, we certainly served intermodal market out of our platform. It's more as a manufacturer and a maintenance provider, mainly a manufacturer. There's not a lot of service elements that we do as a lessor. And there's a large -- most of the intermodal is served through TTX. And so from a value-added perspective of leasing capital and leasing, there's not a big differentiation for us. So when you look at the chart that Brian showed in more detail, there's not a huge intermodal exposure that's deliberate. Because from a cost of capital, from a service differentiation, there's not as many opportunities to differentiate on that. So that's where we serve the market from our platform as a manufacturer.

It's basically a commoditized market, moving commodities. The -- I think it's also worth pointing out that while intermodal is strong, you are seeing a lot of activity in the agriculture space, and we're well positioned to capitalize on that. We're seeing some opportunities coming out of that space as we speak.

Good point.

Next question. You mentioned that manufacturing headcount has declined by 47%, but what about production capacity?

So what we've been working on is footprint optimization, which preserves almost all of the capacity that we have. It's really about making the determination if the order that we're looking at taking in will meet our returns hurdles, even when you have to bring it and hire people, train them. And then on the backside of that, if you're going into a down cycle, you have the redundancy cost. So we'll look at all of that as we decide what work we bring in-house and what type of production levels we'll do in any 1 year. But we do have the physical plant capacity to be able to go up quite a bit from where we are now.

Looks like...

You're up.

The -- yes, I'm just going to the next question. Can you give more specifics on how RailPulse improves reliability and how you'll generate a return on that?