Trinity Industries' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.21.13 | About: Trinity Industries (TRN)

Trinity Industries, Inc. (TRN) Q4 2012 Earnings Call February 21, 2013 11:00 AM ET

Executives

Gail Peck - VP and Treasurer

Tim Wallace - Chairman, President and CEO

Bill McWhirter - SVP and Group President - Construction Products Segment

Steve Menzies - SVP and Group President - TrinityRail

James Perry - SVP and CFO

Analysts

Bascome Majors - Susquehanna

Allison Poliniak - Wells Fargo

Eric Crawford - UBS

Justin Long - Stephens

Steve Barger - KeyBanc Capital

Sal Vitale - Sterne Agee

Matt Brooklier - Longbow Research

Thom Albrecht - BB&T Capital Markets

Operator

Good day, and welcome to Fourth Quarter Results Conference Call. All lines are currently in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session, and please note that today call 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 performances. 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 of any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.

At this time I would like to turn the conference over to Gail Peck, Vice President and Treasurer.

Gail Peck

Thank you, Tasha. Good morning, everyone. Welcome to Trinity Industries' fourth quarter 2012 results conference call. I’m Gail Peck, Vice President and Treasurer at Trinity. Thank you for joining us today.

Following the introduction, you will hear from Tim Wallace, our Chairman, Chief Executive Officer, and President. After Tim, our business group leaders will provide overviews of the businesses within their respective groups. Our speakers are Bill McWhirter, Senior Vice President and Group President of the Construction Products, Energy Equipment, and Inland Barge Group; and Steve Menzies, Senior Vice President and Group President of the Rail and Railcar Leasing Group.

Following their comments James Perry, our Senior Vice President and Chief Financial Officer, will provide the financial summary and guidance. We will then move to the Q&A session. Mary Henderson, our Vice President and Chief Accounting Officer, is also in the room with us today.

I will now turn the call over to Tim Wallace for his comments.

Tim Wallace

Thank you, Gail, and good morning, everyone. I’m pleased with our strong financial results for the fourth quarter and our overall performance during 2012. Last year, we achieved significant revenue and earnings growth. We directed resources toward select markets that have strong demand for our products specifically the North American oil, gas and chemicals industries.

During the fourth quarter, we completed the acquisition of three manufacturing facilities from DMI Industries and acquired a trench shoring equipment business. These acquisitions increased our manufacturing flexibility and further diversify our portfolio of businesses.

The North American energy renaissance has resulted in strong demand for a number of products that our businesses manufacture. During 2012, our businesses successfully collaborated and leveraged our manufacturing flexibility to pursue opportunities to related to these products.

Our railcar barges and containers are critical to the build-out of the North American energy infrastructure. During the past year, we manufactured railcars to transport frac sand, crude oil and variety of chemicals and byproducts associated with oil and gas exploration and production.

Demand for large bulk storage containers for natural gas liquids, chemicals and fertilizers has also increased. In addition, increased movement of petroleum and chemical products along the inland U.S. river system has created robust demand for tank barges.

As 2013 begins, we are well-positioned with long production runs in our manufacturing businesses that serve the oil, gas and chemicals market. Our goal during periods of strong demand is to direct our company’s resources toward building large backlog of orders. We are very successful at doing this during 2012. We are continuing to direct resources towards this goal.

Historically, when we load our manufacturing facilities with long production runs we are able to generate operating leverage and a variety of operating efficiencies. We expect this trend to continue in 2013. We will expand our manufacturing capacity when there are opportunities to obtain orders for products with sustainable demand levels that provide good returns.

We continue to enjoy strong fundamentals in the railcar leasing business. Our railcar manufacturing and leasing businesses are highly integrated enhancing our ability to obtain orders.

During strong market periods, our leasing business creates substantial short-term and long-term value by originating and renewing leases with favorable terms. We are currently experiencing this in respect to railcars that serve select areas of the oil, gas and chemicals market.

The sweet spot of the leasing business occurs during time periods when market demand for leased railcars is strong and capital market conditions are favorable. The debt markets are providing very attractive financing rates for railcars at this time as evidenced by the debt financing we closed in December.

In the past, we have been very successful raising third party lease equity capital during strong markets. We have opportunities in this area. I’m very pleased with the progress we are making with our TrinityRail operating platform and the opportunities it provides us.

From an overall company point of view, I’m pleased with our portfolio of businesses and their ability to collaborate to generate earnings. Our integrated business model is working as intended and our operating business platforms are creating enrichment value through various interactions.

We are investing resources to identify and pursue opportunities to add new businesses to our portfolio that we think will connect well with existing platforms, help produce cyclicality of our earnings, generate stable cash flows, and contribute to our ability to serve our customers' needs. The acquisitions we made in the second half of 2012s are examples that fit our criteria.

As we enter into 2013, we will continue aligning our manufacturing capacity to pursue opportunities in the energy, chemical, transportation and construction industries. The resurgence in North American energy production combined with the aging of America’s infrastructure creates demand for products that align nicely with our company’s portfolio of businesses.

Our solid financial performance during 2012 reflects the seasoned capability of our employees and the strengths of the markets we are serving. This is an exciting time for our company.

I’ll now turn it over to Bill.

Bill McWhirter

Thank you, Tim, and good morning everyone. Our Barge business set a new record for annual revenues in 2012 and can close to surpassing the previous record for profits. I’m very proud of the hard work and dedication of our people.

The fourth quarter profits increased year-over-year by 38% after adjusting for flood-related insurance settlements in the previous year. The sequential improvement in quarterly profits of 16% was a result of favorable pricing and the mix of barge types delivered.

During the quarter, we secured $193 million in new barge orders which brings our barge backlog to $564 million at the end of December. The movement of petroleum and chemical products continues to create a robust market for tank barges. We now have visibility into 2014 for our tank barge facilities. Demand for our hopper barges continues to show weakness as a result of the reduction in domestic coal usage and the poor grain harvest last season.

Many of our hopper customers currently lack a buying catalyst and remain on the sidelines. As a result, pricing and demand for hopper barges has weakened.

From a production perspective we are currently enhancing one of our tank barge facilities to accommodate a few additional production slots during the latter part of 2013. We are also making plans to reposition our hopper barge facilities to manufacture smaller tank barges later in the year.

Moving to our Construction Products Group. During the fourth quarter, this group produced an operating profit of $9.4 million. This is a $2.3 million decline from the same quarter a year ago. The decline is primarily due to a soft highway products market and continued economic uncertainty. The new Federal Highway Bill provides a more stable environment for planning and funding of highway projects. However, budget constraints at the state level still could create a headwind for total highway funding.

In December, we announced an agreement to exchange our remaining ready-mix operations for certain aggregate operations owned by Texas Industries. This transaction, which we expect to close early in 2013, is the last in a series of steps that fully divest of our concrete business. As a result, our concrete business is considered to discontinue operation and the operating results for the business had been excluded from this segment.

In December, we also announced the $40 million acquisition of a company that manufactures trench shoring equipment used by the underground construction industry. The equipment has applications ranging from pipeline and road construction to the installation of utilities. Both transactions were representative of our strategy to reposition the Construction Products segment so that it is in line with products linked to the infrastructure market that have more consistent demand drivers and offer greater opportunity for improved returns.

And finally, closing with our Energy Equipment Group, the results of this segment reflects several repositioning activities that occurred during the fourth quarter. We completed the transition of two of our wind tower facilities to support tank car manufacturing. We also converted one facility recently purchased from DMI to the production of large storage containers focused on a growing energy market.

In addition, the recent extension of the production tax credit for wind energy will provide a nice lift to the business segment. We do, however, anticipate wind tower revenue for 2013 to be lower than our 2012 results. We will continue to remain flexible and may adjust production in response to future market conditions.

Overall, I continue to be pleased with the performance of our business unit teams. Our Energy Equipment and Construction Products Groups were hand-in-hand to provide products for the growing U.S. and international infrastructure markets.

At this time, I will turn the presentation over to Steve.

Steve Menzies

Thank you, Bill. Good morning. I am very pleased with the financial results of the Rail Group and Leasing Group in the fourth quarter and the operating momentum building at both businesses at year-end.

During the fourth quarter, we delivered 4,960 rail cars in line with our expectations for the quarter. Rail car unit production increased by approximately 20% sequentially as we continue to increase our production rate following the repositioning and major line changeovers that occurred during the second half of the year.

Operating profit for the Rail Group during the quarter totaled $70.7 million resulting in a 12.4% margin, which exceeded our expectations, as operating efficiency gains improved throughout the quarter. Our fourth quarter results also included the previously mentioned cost associated with our repositioning.

North American rail car demand continues to be steady driven by demand for rail cars to support the oil and gas and chemical industries. We are also experiencing consistent demand for rail cars to support the automotive sector. Industry orders for new rail cars during the fourth quarter totaled 11,065, the ninth consecutive quarter of industry demand exceeding 10,000 rail cars, an order level that is representative of a fairly healthy rail car market. This is quite impressive when considering that overall economic growth has been sluggish during the same period.

TrinityRail secured orders for 5,620 new railcars during the fourth quarter. Fourth quarter orders were primarily for tank cars, covered hoppers and auto racks, and came from railroads, industrial shippers and third-party leasing companies.

Our total backlog increased to 31,990 railcars valued at an all time high of $3.7 billion. Order inquires continue to be strong thus far in the first quarter. For the last three quarters our orders have exceeded deliveries. We expect this trend to continue in the first quarter of 2013.

Many of our orders extend current production for certain railcar types into late 2014 and for some into 2015. Based on our current production plans, we are projecting delivery of 20,500 to 22,000 new railcars during 2013. While the number of deliveries planned for 2013 is not significantly higher than 2012, the average price for railcar that we will deliver is considerably higher and reflects an improved product mix.

As a result, projections for 2013 show we are on track to meet and possibly exceed previously reported record revenue and profit for the Rail Group.

Our Leasing Group reported as similar level of operating profits and operations compared to the fourth quarter of 2011. This is due to revenue growth from lease fleet additions and higher lease rates offset by increases in maintenance, depreciation and administrative expenses during the quarter.

We added approximately 1,000 new railcars to our wholly-owned lease fleet portfolio during the fourth quarter. We also sold another group of leased railcars from our portfolio as secondary market conditions we remained attractive. These activities bringing our total lease fleet including trip to approximately 71,455 railcars, up slightly compared to the size of a lease fleet at the end of the third quarter of 2012. For the year the lease fleet grew approximately 4%.

TrinityRail’s commercial team has developed a significant competency to originate attractive railcar leases. Our lease origination capabilities attracted the interest of equity investors looking to invest in hard assets such as railcars. We continue to evaluate opportunity to originate and manage third-party equity investments as a way to extend our leasing capacity to generate additional sources of income.

Lease renewal trends for railcar serving the oil, gas and chemical markets continue to be positive due to extended backlogs and production lead times within the industry. Market conditions for these railcar type support renewals of longer lease terms at significantly higher rates.

We have a further ability to re-price aspiring leases transacted during the recessionary period of 2008 to 2010 as they come up for renewal in 2013. This positions our leasing company to achieve potentially greater returns during the next few years.

Our lease fleet utilization at the end of the fourth quarter was 98.6%. Utilization remains high but is down slightly from the previous quarter due to weakness in railcars serving the agricultural and coal markets.

Today, we see a tremendous opportunity to grow our Leasing business at a time when we are achieving excellent returns on our leased railcars. At the end of the quarter, approximately 22% of the units in our railcar order backlog with a total value of $835 million was slated for customers of our leasing business.

In summary, the repositioning of our production footprint has enabled TrinityRail to meet strong railcar demand to serve the oil, gas and chemical industries, and to capitalize on attractive market opportunities through 2013 and into 2014. Now that the facility conversion phase of our reposition is nearly complete, we will face the challenges of additional hiring.

As we move through the year, we expect to operate at fairly consistent production levels providing us the opportunity to realize additional operating efficiency improvements and further margin expansion. Our demonstrated manufacturing flexibility positions us to nicely meet continued strong demand for railcars to transport true crude oil and other products related to the energy and chemical industries.

We expect to continue to see the benefits of a strong lease pricing environment and an active secondary market supporting lease portfolio setups. The railcar market and capital markets are well aligned at this time to support continued growth of our leasing footprint.

I’ll now turn it over to James for his remarks.

James Perry

Thank you, Steve, and good morning everyone. Yesterday, we reported strong fourth quarter and full year 2012 results with year-over-year revenue growth of 11% and 30% respectively and earnings per share growth of 61% and 93% respectively after adjusting for one-time items in 2011. A reconciliation of adjusted earnings per share for 2011 was provided as an exhibit in yesterday’s press release and excludes one-time flood insurance settlement items from 2011 results.

Results in both the Rail and Inland Barge Groups contributed to our strong performance during the quarter. Both of these groups benefited from favorable product mix dynamics and outstanding execution by their operations teams. During the quarter, the Rail Group essentially completed the facility conversion phase of the repositioning of its production footprint and is now in the process of hiring employees needed to meet our production plans in those facilities.

The costs associated with this repositioning totaled $0.04 per share in the quarter. We will continue to seek opportunities to leverage our manufacturing flexibility to align with the growing demand for infrastructure-related products serving the energy, construction, chemical and transportation industries.

During the fourth quarter, we reported a 34.3% effective tax rate, compared to our guidance of 37%. The lower tax rate resulted from certain state income tax benefits recognized during the period. Also during the quarter, we reported an increasing corporate expenses from the same quarter a year ago due to a higher level of legal, environmental and property tax expenses.

As we announced in December, we’re in the process of closing a transaction that will exchange our ready-mix concrete business for certain lightweight aggregate assets. As a result, we have moved the ready-mix concrete operation results in the discontinued operations and adjusted prior periods accordingly. You will find details of the changes that were made to both the Construction Products Group in the consolidated results in our 10-K that we will file later today.

During the fourth quarter, we executed a $334 million asset-backed debt transaction for our leasing company, with an average life of eight years and a historically low blended coupon rate of 3%. We’re very pleased with the favorable terms of the transaction which reflects both the strong market conditions and the attractiveness of our lease fleet to the capital markets.

At quarter end, our unrestricted cash totaled $573 million. When this cash is combined with available capacity under our credit facilities, we had more than $1.2 billion of available liquidity at the end of the quarter.

I will now discuss our outlook for 2013. For the first quarter of 2013, we expect earnings per share for the company to be between $0.75 and $0.82. For the full year, we expect that the consolidated revenues will be relatively flat compared to 2012, but we expect earnings per share of 8% to 18% in 2013. This will result in full year earnings per share of between $3.45 and $3.75.

There are many variables within our portfolio of businesses that will contribute to our ability to achieve earnings growth. As a result, I will provide annual revenue in operating profit guidance for each business segment to supplement earnings per share guidance.

In the Rail Group, we expect 2013 revenues of between $2.4 billion and $2.6 billion, with an operating margin of between 14% and 16%. We expect the Rail Group to deliver between 20,500 and 22,000 railcars in 2013 at a relatively consistent pace of deliveries throughout the year.

In our Inland Barge Group, we expect revenues of between $550 million and $580 million in 2013 with an operating margin in the range of 14% to 16% resulting in operating profit of between $77 million and $93 million for the year. While we expect to report solid results in 2013, at this time our guidance were Inland Barge represents a noticeable step down from the strong performance reported by the group in 2012. The backlog for this business provides good visibility in the tank barge business with the long production runs into 2014. However, as Bill mentioned, weaker demand persists on the dry cargo side leaving some open capacity for hopper barges in 2013.

In addition, due to pricing pressures the hopper barges are currently in the backlog have lower margins in the hopper barges delivered in 2012. It is early in the year and our barge business is highly focused on filling open production capacity.

In the Energy Equipment Group, we expect revenues of between $510 million and $540 million and an operating margin of between 8% and 10%. As Bill commented, the production tax credit for the wind energy industry was extended providing us with improved visibility in the structural wind towers business to the end of this year.

In the Construction Products Group, we expect revenues of between $515 million and $550 million in 2013 and an operating margin of between 10% and 12%.

As a reminder, seasonality is a factor in this business with the second and third quarters representing the seasonal high points aligning with the construction season. Our 2013 guidance reflects the pending divestiture of our ready-mix concrete business in exchange for a certain light weight aggregates assets.

In the Leasing Group, we expect revenues from railcar leasing and management operations in 2013 of between $550 million and $580 million with an operating profit of between $250 and $275 million. This portion of the leasing guidance excludes any revenue or profit from sales of railcars from the lease fleet, which I will address separately.

We are anticipating revenue and deferred profit eliminations stemming from new railcar additions to the lease fleet will be higher during 2013 than in 2012. In 2013, we anticipate the elimination of between $650 and $700 million of revenue and between $1 and $1.20 of earnings per share compared to $486 million and $0.40 per share respectively in 2012.

We expect that the railcars that are committed to the lease fleet within the Rail Group backlog will generate superior returns and annuity like earnings for many years. Trading reductions and short term earnings for a premium stream of long term sustainable earnings is an important element of our strategy to reduce the cyclicality of Trinity’s earnings and increased shareholder return on invested capital.

We will continue to sell railcars from our lease fleet in the secondary market in 2013. Our annual guidance includes $0.20 to $0.25 per share of profit from railcar sales compared to $0.46 per share in 2012. The exact timing of transactions is difficult to predict and we will update you on our activities throughout the year.

As a result of our planned new railcar additions to the lease fleet and expected level of sales of railcars from the lease fleet, we planned to make a net investment in the lease fleet of approximately $350 million to $400 million in 2013. In addition to investing our own capital for railcar leases, we have previously been successful in attracting capital from both debt and equity investors. Strong debt investor appetite for leased railcar assets is illustrated by the attractive financing we completed in December. Equity investor appetite for leased railcars is also strong, and can provide us with more capacity to grow our lease fleet. We’re exploring opportunities in this area, and I’ll update you in the future on any progress that we make.

Before concluding my guidance remarks, I will now provide additional guidance for a few remaining items. Full year manufacturing and corporate capital expenditure for 2013 are expected to be between $160 million and $195 million. During 2013, we expect our corporate expenses will be in the range of $60 million to $70 million and we expect the tax rate of 36% to 38% during the year.

And finally, our earnings guidance is based on a full year weighted average share count of 77 million shares for purposes of calculating fully diluted EPS. As a reminder, we're required to report EPS using the two-class method of accounting result of which reduces net income attributable to shareholders by a small percentage each year.

Our results during 2013 will be influenced by multiple factors including the amount of operating leverage and efficiencies that our manufacturing businesses can achieve, the level of sales of railcars from the leasing portfolio, the amount of profit eliminations from railcar additions to the lease fleet, and the impact on weather conditions on our Construction Products businesses.

We are pleased with our performance in 2012 as our employees met the many challenges and opportunities presented at Trinity during the year. In 2013, we are confident that they will perform well again and we look forward to reporting our results with you during the year.

Our operator will now prepare us for the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll take our first question from Bascome Majors with Susquehanna. Please go ahead.

Bascome Majors - Susquehanna

I was curious in your guidance for railcar deliveries, how much of that for the current year is in firm backlog today and how much would be perhaps reflective of an order uptake in some of the freight car markets that had been weaker recently.

Steve Menzies

Bascome, this is Steve Menzies. Significant portion of our backlog for 2013 is in orders, our production plans are in firm orders, we do have a few open production slots in our freight car lines for 2013.

Bascome Majors - Susquehanna

And with freight cars announcement this week that they are opening some of that stagnant capacity in Alabama. How does that affects the competitive landscape for some of the freight car markets and then how do you guys – are you sure they respond to that?

Steve Menzies

Steve, again Bascome. I guess we’ve been aware of that facility it has been available and we read the announcement yesterday, but there we doesn’t have any significant impact on our plans and our operations at this point in time. We certainly watch to see what happens there, but there is no reaction from us per se.

Bascome Majors - Susquehanna

And just one on the wind business I know that’s going to be down and you alluded to that this year but with the renewal of the tax credit early this year and potential for that to get stronger into 2014. Could you just walk us through how that landscape has changed competitively with some people actually in the market and sort of what your share look like a couple of years ago and what it might look like if that business does comeback in 2014?

Tim Wallace

Bill, you want to respond to that.

Bill McWhirter

Sure. Bascome, from our perspective on the wind tower business as I stated in my comments we moved a couple of those facilities over to tank car production. So, our production footprint is a little smaller although with the acquisition of the DMI assets we have some flexibility available to us. So, I think from an overall competitive landscape perspective Trinity is in a good position with good assets, I think right now the market is a little unsure of how aggressive wind tower and in particular wind turbine production will be for the next couple of years but its certainly a plus as compared to not having the PTC.

Bascome Majors - Susquehanna

And just on a stable number of orders assuming they do come back, can we assume that your market share would be much higher in that business than it was perhaps when Chinese imports were pressuring you and there were more competitors in the market space?

Tim Wallace

Bascome, I really don’t think we could comment on what the market share might be, we tend not to be so market share focused I suppose really focused on particular orders that fit well on to our plans and provide profitability to the company.

Operator

Thank you. We will take our next question from Allison Poliniak from Wells Fargo. Please go ahead.

Allison Poliniak - Wells Fargo

The Rail side, and correct me if I’m wrong, Trinity could -- it sounds like you have additional capacity or potential for tank cars if you obviously have the right order. Are there any issues on a component and I’m thinking on the tank car side that wouldn’t limit you I guess increasing production the tank cars this year?

Steve Menzies

Yeah. Alison, it's Steve. Thank you. First part component availability has not been a constraint the industry seems to be able to respond to increasing demand also a number of components that we make for ourselves. So we are able to control some of that. So at this point in time I don’t see component supply as a constrained in the tank car sector.

Allison Poliniak - Wells Fargo

And then on the leasing side you know James had indicated a lower level of sale that in lease fleet this year. Has anything changed for you guys to give that kind of guidance or you just trying to be able to conservative at the start of the year? Just given the uncertainty around that?

Tim Wallace

James?

James Perry

Yeah Alison its James. Good morning. I think the dynamics are still there it simply where we are this early in the year the expectations we have, yeah the numbers are little lower than last year on an EPS basis. But given where we are in mid February what we are seeing in the market. We feel that’s the right level for us to guide it at this point.

Operator

Thank you. We’ll take our next question from Eric Crawford with UBS. Please go ahead.

Eric Crawford - UBS

Did you talk a bit about your inquiry levels for tank, rail cars? Has there been a noticeable trend up or down or has it just been remaining relatively stable?

Tim Wallace

Steve?

Steve Menzies

Yeah, Eric, we’ve seen significant demand for tank cars to reserve the oil, gas and chemical industries and I think as I pointed out that we’ve seen continuing strong inquiries into the first quarter and what we think the trend will be through the first quarter. So I think when you look at what’s really happening in the Energy sector. Rail is going to play an important role in the development of the infrastructure to support that industry and we think it’s a long term role. So that’s exciting for us and we think we are well positioned to take advantage of those opportunities.

Eric Crawford - UBS

I guess just as a point of clarification looking at your earnings guidance works out at the midpoint about $0.90 per quarter. So I am just curious what the cadence is how you are thinking about that due to the year?

James Perry

Sure. This is James, Eric. We gave the $0.75 to $0.82 guidance for the first quarter as we mentioned there is some seasonality in some of our businesses especially the construction products business in the second and third quarters. So you would see a tick up from the first quarter in that respect. We also continue to gain operation efficiencies and operating leverage in our businesses as we said which is part of our forecasting model as these facility conversions have been essentially completed in rail we’re in the process of hiring the people to meet our production plans and we always look to operational efficiencies there. So to your point it’s maybe not steady through the year but we do expect from the first quarter through the rest of the year to pick up.

Eric Crawford - UBS

Okay that’s very helpful. But for rail car deliveries themselves, I think you said would be relatively consistent?

James Perry

Relatively consistent pace again, this is James, Eric. As we look at pricing coming to the business and efficiency that’s where you see some improvement as we go through the year.

Operator

Thank you. We will take our next question from Justin Long with Stephens. Please go ahead.

Justin Long – Stephens

After some of the manufacturing transitions that were made over the past year, it sounds like you are very well positioned for the long production runs that you’ve talked about, but could you comment on any plant changeovers within your manufacturing footprint in 2013 or would you say at this point most of the adjustments have already been made?

Tim Wallace

This is Tim. I think we will tweak some adjustments depending on market movements that we see and then we got this extra capacity that we acquired last fall that we are looking at very strongly, we have one of those facilities already shipping products or both – two facilities we are shipping products out of them right now and those facilities appear to be very flexible and we might end up with one of them doing a combination of products within our company. We’ve done that many times before and been highly effective in that area. So the oil, gas and chemicals markets both for containers as well as rail cars mix well inside one of our facilities.

Justin Long – Stephens

And maybe on a similar note, I was curious if you could talk about your ability to transition to build some of these non-tank car types if we start to see a pickup in these markets going forward as the cycle progresses, could you provide some color in terms of the timing cost et cetera associated with switching say a tank car line to build an intermodal car or a hopper car or something else?

Tim Wallace

Steve?

Steve Menzies

Justin, long conversation about cost and changeovers and probably not for just conversation, but we have plants that are making freight cars today those are all well positioned for recovery and covered hopper demand which we think will be forth coming as a ripple effect of the oil and gas expansion. We also see other demand for covered hopper car serving some of the chemical markets and commodities market. So we are ready to pursue that business when it comes around and we have our tank car plants working and meeting up production plans and working towards greater operating efficiencies.

Tim Wallace

And you have certain freight car facilities that you are keeping intact that you are not changing over to tank car, they will be just sitting there ready for additional orders, right, Steve?

Steve Menzies

No question. We are well positioned as well as orders recover.

Justin Long – Stephens

Okay. So you have the ability to ramp up capacity at some of these freight car lines just based on your footprint and your manufacturing facilities today?

Steve Menzies

We just do Justin and we are making freight cars today.

Justin Long – Stephens

Right.

Steve Menzies

So we are in production of several different freight car types today.

Tim Wallace

We have significant capacity in our tank car plans to produce more volumes and that’s what we are doing last year at this time, large volumes, freight cars coming out of that facility.

Justin Long – Stephens

Got you, that’s helpful. I appreciate it. I think my last question is a little bit higher level but obviously we have seen a lot of growth – our growth in the lease fleets since the last cycle curious to get your thoughts on the long-term strategic plan for that business as you look at in over the next five years or so. Do you think we are going to be looking at a much larger lease fleet versus where it stands today or more just kind of modest growth in that fleet going forward.

Tim Wallace

This is Tim. Our leasing platform and the integration of our leasing business with our manufacturing business provides as a number of different opportunities in a number of different areas and we worked for a decade to obtain the scale of the lease fleet that we have now. When Steve was talking in the 70,000 level, we are not really focused on how big we can become, we are more focused on how much value can we create with the platform that we have, we are offering varieties of services and leases and we like the ability to go to the marketplace to our customers and say we can sell you the cars. We can lease you the cars. We can sell them with you having the right to lease them or we can lease them if you having the right to buy them.

So it ties into this flexibility that drives our company and so we don’t have specific goals and objectives of saying we want our leasing company to be large to a particular size. We have the goal and objective to say let’s have our leasing business integrated well with our manufacturing businesses and let’s create value with that platform. And so, that’s our objective.

Operator

Thank you. We will take our next question from Steve Barger with KeyBanc Capital. Please go ahead.

Steve Barger - KeyBanc Capital

Does your backlog right now reflect the same mix as the industry where 80% is tank car for them?

Tom Wallace

We don’t disclose the key elements of our backlog.

Unidentified Company Speaker

Obviously, very significant part of our backlog is tank cars but specifics of which we don’t disclose.

Steve Barger - KeyBanc Capital

And if I heard right, you said the average car price would be up on a year-over-year basis which makes sense of the mix changes. But, can you frame you that up relative to the number in 4Q or is it going to be significantly above that number?

James Perry

Yes, Steve. This is James. If you see the orders we have taken in the quarters and the value of the cars in the backlog is growing over the last several quarters, Q4 to Q1 is getting a little precise for us, but the current is certainly moving in the upward direction on pricing as we work through the backlog.

Steve Barger - KeyBanc Capital

And that should improve throughout the year as you start to monetize cars you took later in 2012, is that fair?

Unidentified Company Speaker

I think generally speaking again the cars in the backlog now are price to the higher level, quarter-to-quarter it may vary. But, generally speaking the trend is moving up.

Steve Barger - KeyBanc Capital

Okay. And I will try this one. Did you deliver more tanks than other types in the quarter and if you didn’t, when do you expect to hit that inflection point?

Steve Menzies

Steve, this is Steve. Appreciate the effort. We will not provide a breakout of product mix and production. So I appreciate the spirit of the question.

Steve Barger - KeyBanc Capital

Well, you guys have converted some plans obviously to tank car production. Other competitors who are trying to increase tank car capacity, any thoughts on where the industry can get to on a run rate basis when kind of everybody is ramped what the quarterly run rate could be, just trying to think about that in the context of the total backlog?

Tim Wallace

Steve, this is Tim Wallace. In my years of experience that we have always been amazed at the industry of how it can bring on extra capacity and that’s why our whole model is build around flexibility and making decisions on capacity based on sustainable demand and returns and its just really hard to fathom what the number could be, if the industry puts its mind to that because its very powerful industry. And we have got some really good strong competitors there – would be with us day in and day out basis.

So we don’t, we really focus on ourselves and focus on what we can do like Bill was saying earlier on instead of market share or anything we go after orders that we know are will potentially bring value to us. So I don’t know that number could end being.

Steve Barger - KeyBanc Capital

And now I will just switch gears to the lease for a minute. When you net out additions and sales out of the fleet, did you say how many cars specifically you expect to grow the fleet by?

James Perry

Steve, it’s James. We didn’t give the car account. We said the net growth will be about $350 million to $400 million. If you look at the average car in our backlog, you can do some math and get rough range but again its going to depend on which cars we put into lease lead, which cars we sell more importantly will impact the number quite a bit.

Steve Barger - KeyBanc Capital

And Steve, did you say what the average remaining terminal lease lead is, or can you talk basically about for new leases that you’re signing what kind of term you’re able to get?

Steve Menzies

I don’t comment on the average remaining lease term we’re looking at up for while we talk but I clearly, we’re seeing longer lease terms and new railcar leases and I would say the lease terms we’re looking at are significantly longer than what we've historically seen in the industry. So, I would think that longer terms and lacking in high lease rates and high returns is that we don’t want to do in this industry.

Steve Barger - KeyBanc Capital

Hey James do you have a statistic?

James Perry

Yeah, we do and that will be in our 10-K of course we’ll follow later its about three in a quarter years 3.3 years Steve so its inline with what you’ve seen lately obviously before you get to here shorter on term versus what we add each quarter but it’s about 3.3 right now so its where its been.

Steve Barger - KeyBanc Capital

Okay, and just one last one. And we have heard some of the other sources the report numbers say that some of the tank car leases are stretching out as much as 7 and 10 years is it reasonable to think that you have the ability to get that same kind of exposure?

Unidentified Company Speaker

Yes.

Operator

Thank you. We’ll take our next question from Sal Vitale with Sterne Agee. Please go ahead.

Sal Vitale - Sterne Agee

Just a quick question regarding something mentioned in the earnings release. The sequential increase in the backlog, the dollar value of the backlog part of that was attributed to renegotiations on prices on certain contracts. Can you give a little bit of color on that, is that just essentially a price escalator on raw materials?

Tim Wallace

James?

James Perry

Yeah. This is James, Sal and just to pick one word renegotiation isn’t really the word the contracts call for certain price adjustments is where we get closer to building the cars and look at the pricing of the materials and those type of things so as we have such a long term backlog and so many cars in that with these type of arrangements we have those adjustments from time to time because we have so many cars right now the adjustment is a little larger than it has been in the past given the escalation and certain things so we wanted to call that out.

Sal Vitale - Sterne Agee

Okay. But should we expect the escalation to be accretive to the bottom line or is it just basically going to be offset by cost?

Unidentified Company Speaker

It’s generally a pass through sell so I wouldn’t see having material impact on the earnings itself.

Sal Vitale - Sterne Agee

Okay, makes sense. And then just a question on the backlog, currently for the orders you’re taking on tank cars what is the earliest delivery?

Unidentified Company Speaker

Are you placing an order Sal or…

Sal Vitale - Sterne Agee

I am, I am.

Unidentified Company Speaker

Okay, our sales but we have to talk to you about that confidentially and privately but you want a tank car you’re going to be very late in 2014 and most likely in 2015.

Sal Vitale - Sterne Agee

Late in 2014, okay so what I’m trying to get a sense for what the deliveries could like for 2014, I understand you don’t give that kind of guidance, but essentially is there any reason to think that if the orders for non-tank cars that you received throughout this year or, a non-materially different than the orders that replaced for non-tank cars last year that your deliveries for 2014 should be well above your 2013 deliveries?

Unidentified Company Speaker

You know I, we’ll, we’ll have to see that that’s well beyond what we’re prepared to talk about today so.

Operator

And we’ll take our next question from Matt Brooklier from Longbow Research. Please go ahead.

Matt Brooklier - Longbow Research

I just wanted to clarify earlier comment on the 3DMI manufacturing facilities, are there one or two currently producing the, this storage tank product?

Tim Wallace

There is, this Tim. There is currently one producing storage tank and we’re looking at a second one as to the potential that we could put in there and it could be producing sometime in the future.

Matt Brooklier - Longbow Research

Okay. And on that second location, I think you also mentioned there, there is a potential to do a split and use storage tanks and another product so is it, did I hear that correctly?

Tim Wallace

Yeah, we think the DMI facilities as a whole all have multipurpose capability within the products in our portfolio. And so we planned to run on that way, we have a number of our facilities that are like that, and so we don’t, is really not a major event for us if we bring another product in and run at along side of a second, first primary product that we have. So, we have a number of multipurpose facilities and those facilities will end up probably being multipurpose facilities as well.

Matt Brooklier - Longbow Research

And have you talked about the, I guess you kind of to hit but that the third facility when that could potentially come online and what you know what, what products could be manufactured there?

Bill McWhirter

Yeah, Matt, this is Bill. The third facility which is the facility in Canada we don’t have a date for it coming online we’re still analyzing the potential for products coming out of it from a fit perspective it’s very similar to the other two facilities so it’s capable of producing many of Trinity’s products but we don’t have a date at this time.

Matt Brooklier - Longbow Research

And then, and then we, when we look at your aggregate manufacturing footprint you have the three acquired DMI facilities that are coming online, you perhaps and converted the wind towers the wind tower facilities and getting ready to push product out of there. I’m just curious as we’ve gone through this process, where do we stand from a all-in capacity utilization perspective on the entire – the entire manufacturing footprint.

Unidentified Company Speaker

Yes. As I said, we kind of have unlimited manufacturing potential in our company because we have a number of multipurpose factories that we have and so we’re constantly looking at which orders are out there that provide the most value to us and we can shift over our facilities relatively fast in fact I think the wind tower facilities that we’ve converted are already shipping railcar products out of them as we speak.

Matt Brooklier - Longbow Research

Okay.

Unidentified Company Speaker

And like I said a lot of times we’ll bring other products and run them adjacent to the primary products that’s running there so it’s really a challenge for us to say we’d have a capacity of X or Y for any one of our particular product lines.

Matt Brooklier - Longbow Research

Okay. But I guess is the message being – you have incremental capacity moving out outside of what you’ve acquired or converted at this point.

Unidentified Company Speaker

Absolutely and I think you’ll find that that’s the mode we’ll be in for - that’s in the future as we’ll be looking for businesses that fit within the (inaudible) and platforms of businesses that we have that give us that multipurpose capability and that’s what kind of drives our company as this whole manufacturing flexibility we’re being able to do direct resources and our capacity towards markets that have a robust flair to them.

Operator

Thank you. We’ll take our next question from Thom Albrecht with BB&T Capital Markets. Please go ahead.

Thom Albrecht - BB&T Capital Markets

Steve, I wanted to delve a little bit more in to the demand for different car types. So we know grain and coal have impacted the hopper market but what are you seeing relative to plastic pallets. And then also the auto market where you had made favorable comments the last couple of quarters I don’t think I hear any demand comments this morning.

Steve Menzies

Yeah, thanks, Tom. I did make a comment that we have seen consistent demand for railcars to support the automotive sector and I would expect that to continue with the major assembly plants coming online in Mexico and some changes in the distribution patterns in the delivery of automobiles I think is an opportunity for additional railcars.

You mentioned the plastics business; it is a natural progression available low priced natural gas that we are going to see increased production of resins here in North America is going to take a while for those facilities to be build and for the expansions to be completed. We’ve seen some inquiries for plastic pellet cars thus far and we think their (wave) is maybe 18 or 24 months away from really starting.

Thom Albrecht - BB&T Capital Markets

And then couple of other questions too, I am sure it’s not nearly as profitable, but the small cube hopper, which was in early fracing play, it is also a construction play for cement and things, what’s going on with that car type and at this point of the cycle how interested are you in building such a car?

Unidentified Company Speaker

We are thrilled to build that car, we build many of them last year and we would expect that there will be some sort of a pickup in demand for small cube covered hopper cars as we see improvement in the housing industry, and in the construction industry. And we also think there will be a recovery in drilling for natural gas, and when that happens we should expect a resumption in demand for small cube covered hoppers.

Thom Albrecht - BB&T Capital Markets

Okay, and then to refresh my memory maybe this is for James, I’ve got (some) notes somewhere I couldn’t find it, so for 2013 the $0.20 to $0.25 of profit from rail car sales versus $0.46, is that for the cars over or under one year?

James Perry

Yeah, when we look at that and what we report in that respect is all inclusive okay, where you think the distinction is on the revenue side and you will see that breakdown in the 10-K for us, I mean obviously it skews the margin, so we try to provide that data for you in the press release that that number is all inclusive of that.

Thom Albrecht - BB&T Capital Markets

And then one last question, so with the tank market I think the presumption maybe wrong, but is that – it was overwhelmingly driven by petroleum last year, and that maybe in ’14 and beyond chemicals really kicks in, but from your perspective the tank market, was it mostly petroleum or was there a better balanced petroleum and chemical customers last year that maybe we all realize?

Tim Wallace

Hey, Tom, this is Tim. Are you talking about tank and containers or tank and rail tank cars as rail cars?

Thom Albrecht - BB&T Capital Markets

Well, you can address both, I was really talking on the rail car side, but also maybe what you saw on the tank side, I am sorry - the container side?

Tim Wallace

Yeah, we are expecting it to be just like what Steve was talking about in the plastic pellet area that, he looked at it as and it really plays over all three of our major product lines are containers, our barges and our railcars that you have the oil, gas and chemicals market that play-off wit each other. And there is a variety of storage type tanks that are used in the processes of oil, gas and chemical market. And there is variety of transportation vehicles that are used whether it be railcars or barges.

So, we are aligning ourselves to where we can serve the transportation needs as well as the storage needs for the oil, gas and chemicals market. And they are coming at as from a number of different directions, which has created the excitement that we have going on inside of our company and that’s why it works well for us.

With this platform that we have that is highly flexible, where we can shift production from one facility or the other and bring on additional production when customers have needs and customers are contacting us a lot of time right out of the blue with some pretty strong demands. And then the team here gets together and says what can we do to bring on some more capacity to take care of this customers needs and that’s a lot of fun to see that happening inside of our company.

Thom Albrecht - BB&T Capital Markets

And I said last question, but I actually thought of one more. On the 14% to 16% EBIT margin guidance for the rail manufacturing group, would you expect it even starting in the first quarter you will be able to hit the low end of the guidance range even though I know that was an annual target?

James Perry

Yeah, really we gave -- this is James. We gave the annual number because as we are continuing to hire the employees for that work through the backlog, it’s hard to get a real precise quarter to quarter or year, 12.4% in the fourth quarter. We see that ending the year 14% to 16% annually, but the distinction between one quarter and the next right now it’s hard to determine. So we wouldn’t press ourselves into saying where we are going to be within that range in a particular quarter.

Thom Albrecht - BB&T Capital Markets

And there is no more repositioning cost within the plants, the way there was the last two, is there?

James Perry

When we say repositioning it really has two phases. It has the phase of getting the assets repositioning and the facility equip and then we’ve got to reposition the employees in the facilities depending on what the demand level is, so there is two phases and Steve had talked about a learning curve that he had in some of the facilities that was associated with kind of the second phase.

So, and this will be a trend that will happen in our plant, in our company as we go along, as we exercise as manufacturing flexibility we convert the equipment that we are in and we will have to retrain some of the employees. In other facilities we will let line sit idle and then shift the employees to potentially other areas and then when the product comes in we can just crank over that line, so each one is a little bit different depending on the particular product that we are talking about.

Operator

And at this time we have no further time for questions. I would like to turn it back to the floor for closing comments.

Gail Peck

Thank you. That concludes today’s conference call. A replay of this call will be available after 1:00 ‘o Eastern Standard Time today through midnight on February 28, 2013. The access number is 402-220-0120. Also the replay will be available on the website located at www.trin.net. We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.

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