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Trinity Industries (NYSE:TRN)

Q1 2014 Earnings Call

April 30, 2014 11:00 am ET

Executives

Gail M. Peck - Vice President and Treasurer

Timothy R. Wallace - Chairman, Chief Executive Officer and President

William A. McWhirter - Senior Vice President and Group President of The Construction Products & Inland Barge Groups

D. Stephen Menzies - Senior Vice President and Group President of Trinityrail

James E. Perry - Chief Financial Officer and Senior Vice President

Jessica L. Greiner - Director of Investor Relations

Analysts

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Eric Crawford - UBS Investment Bank, Research Division

Bascome Majors - Susquehanna Financial Group, LLLP, Research Division

Justin Long - Stephens Inc., Research Division

Matthew S. Brooklier - Longbow Research LLC

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Kristine Kubacki - Avondale Partners, LLC, Research Division

William L. Baldwin - Baldwin Anthony Securities, Inc.

Operator

Good day, and before we get started, let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and includes statements as to estimates, expectations, intentions, and predictions of future financial performance. Statements that are not historical facts are forward-looking.

Participants are directed to Trinity’s Form 10-K and other SEC filings for a description of business issues and risks, a change in any of which could cause actual results or outcomes to differ materially from those expressed in these forward-looking statements.

It is now my pleasure to turn the call over to Ms. Gail Peck, Vice President and Treasurer. Please go ahead.

Gail M. Peck

Thank you, James. Good morning, everyone. Welcome to the Trinity Industries' First Quarter 2014 Results Conference Call. I'm Gail Peck, Vice President and Treasurer of 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 Groups; and Steve Menzies, Senior Vice President and Group President of the Rail and Railcar Leasing groups. 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.

Timothy R. Wallace

Thank you, Gail, and good morning, everyone. I'm very pleased with our record financial results for the first quarter, which was enhanced by a large sale of railcars from our lease fleet. Our businesses did an outstanding job of driving operating leverage and efficiencies to the bottom line. We're also making good progress in the business development area.

We completed 3 acquisitions during the first quarter within our Energy Equipment Group. These activities built upon the positive momentum already occurring within our company.

Our Rail Group generated record financial results in the first quarter and significantly increased its order backlog. I'm pleased with the group's ability to continue improving its performance while converting manufacturing space, making line changeovers and collaborating with Trinity's internal supply chain to maximize profitability.

Our Railcar Leasing and Management Services Group delivered another quarter of solid operating results. In addition, they did a good job of completing the railcar transaction I mentioned earlier.

I'm pleased with our Inland Barge Group's financial performance during the first quarter. They obtained orders during the first quarter that were crucial to filling gaps in their production lines for the balance of the year.

Our Construction Products Group continues to make good progress, improving its overall performance, resulting from the repositioning activities we completed last year.

The first quarter financial performance of our Energy Equipment Group continued to show improvement year-over-year. I'm pleased with this group's efforts to expand its product offerings.

Today, Trinity is uniquely positioned to provide a variety of transportation and storage products to the oil, gas and chemicals industries. Our Railcar, Barge and Energy Equipment groups have very high quality products to serve the demand in these industries. We will continue to leverage our resources to pursue opportunities to expand our product offerings and extend our market leadership positions.

Trinity's financial performance during the first quarter demonstrates the progress we're making in attaining our corporate vision of becoming a premier diversified industrial company. Our strong financial results were supported by the successful execution of our corporate business model, which generates value by leveraging the strengths of our businesses within our portfolio.

Many of Trinity's businesses receive, share and generate value through various interactions with one another. I'm very pleased with the way our businesses are collaborating to generate strong financial results for our company. I'm very proud of our people, whose capabilities and hard work enable us to realign our manufacturing capacity to meet strong demand for products to support the energy industries.

Our short-term priorities during the next year are to operate our company on lean principles while providing superior products and services to our customers, create shareholder value through a variety of organic initiatives, acquire and successfully integrate industrial manufacturing businesses into our portfolio and to conduct railcar leasing and other asset transactions that provide incremental earnings. Today, Trinity is in a strong position, with backlogs of orders in our major businesses that enable us to continue to generate operating efficiencies. Our future is bright, our financial health has never been better and we have a great deal of positive momentum occurring within our company.

I'll now turn it over to Bill for his comments.

William A. McWhirter

Thank you, Tim, and good morning, everyone. The Inland Barge Group achieved strong margins during the first quarter on slightly lower revenue due to a favorable product mix and production efficiencies in our plants. During the first quarter, we received orders totaling approximately $215 million, bringing the barge backlog to $508 million at the end of March. Our production plans for 2014 are now solidified, and orders are being taken for deliveries in 2015. Demand for hopper barges is recovering as scrap prices improve and barge traffic along the inland waterways increases due to stronger exports of corn, wheat and soybeans. Demand drivers for tank barges continues to be favorable, with backlogs in the industry stretching into 2015.

As infrastructure investments in the energy sector are completed, we expect additional expansions in downstream markets, resulting in rising shipments of chemical and petrochemical commodities. As a result of the improvement in hopper barge demand and the level of orders taken during the quarter, we recently shifted some production capacity from smaller tank barges to hopper barges. We also enhanced our profit forecast for the Inland Barge Group in 2014. I am pleased with how our barge group has responded to various demand drivers and maximized efficiencies within the plants to drive profit. This group's operational flexibility is a key differentiator, enabling us to enhance profitability and respond to our customers needs.

Moving to our Construction Products Group. Year-over-year revenue increased modestly during the first quarter due to acquisition-related volumes. A more favorable product mix drove an increase in operating margin from 7.4% during the first quarter of last year to 9.3% this year on an adjusted basis, excluding the gain on a land sale. I am pleased with the performance of this group, considering much of the first quarter was negatively impacted by weather conditions across the country. Included in the first quarter profit is an $11.2 million gain on the sale of certain land held by our Aggregates business. This gain was included in our annual guidance provided for the group on the last conference call. First quarter results for the Construction Products Group typically reflect the seasonal low point, and we expect a pickup in activity across the group's portfolio during the summer construction season. So far this quarter, we have seen strong demand in the Texas market, which is usually a good indicator of overall demand for our Aggregates business. Inquiry levels for highway products continue to remain stable compared to 2013, although uncertainty exists due to the upcoming expiration of the current federal highway bill in October. We are monitoring potential legislation closely and are prepared to respond should demand levels change.

Moving to our Energy Equipment Group. During the first quarter, the group set a new record for quarterly revenues and increased its operating profit performance year-over-year by 54%. Revenues and profits increased primarily due to higher shipments of storage containers serving the energy sector, coupled with improved performance in our wind tower business. I am pleased with the progress we are making integrating our recently acquired companies.

In the first quarter, we announced 3 acquisitions in the Energy Equipment Group. Two of the acquisitions were in the cryogenic container market, which places Trinity among the North American market leaders providing cryogenic transportation equipment. The addition of Platinum Energy Services expands our product portfolio to include energy-related equipment used at the well site and in midstream locations. These businesses, combined, are expected to add revenue of $90 million to $100 million on an annual basis.

We continue to invest resources to identify and pursue opportunities to add new businesses to our industrial portfolio that enhance our competencies, complement our product offering and expand our reach in the markets we are pursuing. Overall, I am pleased with our performance during the first quarter.

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

D. Stephen Menzies

Thank you, Bill. Good morning. I continue to be very pleased with the operating performance and achievements of our Rail and Leasing Groups. The focused efforts of our dedicated TrinityRail team, the benefits of our integrated business model and both our operating and financial flexibility continue to drive record performance levels for our businesses.

During the first quarter, our Leasing Group again earned record operating profit due to continued strong market fundamentals as well as profit recognized from sales of leased railcars to Element Financial Corporation. Lease renewals continue to show strong rate increases and longer lease terms.

Our lease fleet utilization at the end of the first quarter was 99.5%, up from 98.4% last year. So far in 2014, we have sold $517 million of leased railcars in the secondary market, the majority of which were sold to Element under the strategic alliance formed last December. Selling railcars from our leased portfolio to various financial institutions and managing those leases while retaining our commercial relationships with the lessees is an important strategy of the TrinityRail business model. We developed a strong competency in syndicating leased railcars while simultaneously growing our wholly-owned lease fleet.

Secondary market activities help us to manage lease fleet portfolio diversification and create additional value through the monetization of leased assets when market conditions are most favorable. I am very pleased with the success we've had in growing our leasing platform and expanding our access to institutional capital to support our strong lease origination capability.

During the first quarter, our Leasing Group took delivery of approximately 2,280 new railcars. Our total lease fleet portfolio, including partially-owned subsidiaries, now stands at approximately 73,545 railcars, a 1% increase year-over-year even after first quarter leased railcar sales. At the end of the quarter, approximately 22% of the units in our railcar order backlog, with a total value of $1 billion, were slated for customers of our leasing business.

During the first quarter, the Rail Group delivered 6,890 railcars and generated our highest-ever quarterly operating profit and margin. The skill and efficiency with which our employees have enhanced our operational flexibility, leading to further increases in our production capacity to accommodate growing customer demand, is quite remarkable. Their hard work and dedication is reflected in the significant increase in our operating margin compared to the fourth quarter on a relatively stable revenue base, driving incremental earnings to the bottom line.

We are currently generating record operating profit and margins. The rate of margin expansion over the last year has been significant, and we will continue to focus our resources on enhancing our profitability. Ultimately, we are most focused on delivering quality earnings growth to the company through sustained volume increases. Our strong order backlog comprised of a favorable product mix positions us to realize further benefits from extended production runs.

North American railcar industry orders in the first quarter were very strong and reflected a healthy mix of freight car orders. During the first quarter, TrinityRail received orders for 9,625 new railcars, including 10 cars and covered hoppers, from railroads, third-party lessors and industrial shippers. Our backlog increased to a record 42,630 railcars with a record value of approximately $5.2 billion. Current inquiry levels reflect continuing demand for covered hoppers to serve the oil and gas drilling and construction markets, agricultural products and petrochemical such as resins. Auto racks continue to be in steady demand, resulting from increased North American automotive production and replacement of the aging North American auto rack fleet.

While overall tank car orders for the industry have slowed in recent quarters, order inquiry levels remained strong, and we are in dialogue with a number of customers ready to place orders. Our customers, like us, are assessing the potential impacts from pending regulatory changes and, as you would expect, delaying decisions to obtain railcars given the uncertainty surrounding specifications for tank cars carrying flammable products. We believe this is only a temporary delay, and we expect to see strong demand for tank cars serving the oil and gas industries once new regulations are finalized.

We are monitoring closely the potential regulatory actions of PHMSA, the U.S. Department of Transportation and Transport Canada with respect to changes in railcar designs for tank cars carrying flammable commodities. PHMSA recently proposed an accelerated timeline that we expect to lead to a final rule shortly after September 30, 2014. Transport Canada also recently took several initiatives, which will have effect on tank cars used to transport certain flammable products in Canada. As we gain further clarity from the regulatory process, we will provide an update on how we plan to address regulatory changes. We are currently investing capital in our rail business for organic growth opportunities, operating improvements and to be prepared to respond to demand increases associated with new tank car regulation. Our intent is to enhance our operational flexibility by having additional manufacturing capacity capable of producing multiple products that will be ready to respond as the level of demand increases.

We are in the process of bringing online a large existing railcar manufacturing plant located in Georgia. Initially, we are planning to produce a group of tank cars at that plant intended for our leasing business. In addition, we are also taking steps to expand our maintenance services capacity to meet the maintenance and regulatory requirements of our growing lease fleet and key customers. As we make these investments, there will be associated startup costs that are incurred by the Rail Group having a near-term adverse impact on Rail Group operating margins.

Our team has demonstrated great skill at bringing on new operations and additional capacity, and I am optimistic we will continue to be successful. As a result of the orders received in the first quarter and capacity increases, we have increased our 2014 unit delivery guidance to be in the range of 27,500 to 29,000, an increase from our previous guidance of 25,500 to 27,500. Our operational flexibility and strong lease origination capability differentiate TrinityRail and enable us to respond quickly to changes in market demand. Our current delivery forecast for 2014 is on pace to exceed our prior annual record delivery level. This is a very exciting time for TrinityRail as we continue to see a broadening in railcar demand as the economic recovery accelerates, developing fleet replacement opportunities and ongoing strong demand catalysts from the North American energy renaissance.

I will now turn it over to James for his remarks.

James E. Perry

Thank you, Steve, and good morning, everyone. Yesterday, we announced record results for the first quarter of 2014. For the quarter, we reported record revenue of $1.5 billion and record earnings per share of $2.85 compared to our first quarter guidance of $2.45 to $2.65 per share. Included in our results and in first quarter guidance were proceeds from the sale of $514 million of new and existing leased railcars to Element, completed under the strategic alliance that we announced in December, with an EPS impact of $1.43.

Our first quarter earnings, without the profit from sales to Element, represent a quarterly record for Trinity. All of our business units contributed to our strong quarterly results, with each group reporting year-over-year improvement in quarterly operating profit and margin.

Our tax rate for the first quarter was 32.5%, lower than our guidance of 35% to 36% primarily due to the benefits of certain domestic manufacturing deductions, lower state taxes and the partnership tax status of our noncontrolling interest. The lower tax rate accounted for $0.13 of incremental EPS during the first quarter as compared to our guidance.

Our current earnings guidance assumes a tax rate of 34% for the remaining 3 quarters of 2014. As we mentioned on our last call, the company's convertible notes will have a dilutive impact on EPS when the average stock price for the quarter exceeds the conversion price of the notes. During the first quarter, the average stock price was $64.08, which was well above the conversion price, in effect, of $50.69. As a result, 1.9 million additional shares were added to our share count in the calculation of EPS for the first quarter, reducing EPS by $0.06 per share. For the remainder of the year, our guidance assumes a $72.50 stock price, our recent level, resulting in an annual average stock price of $70.40 and 2.5 million additional shares in the calculation of annual EPS, an impact of $0.24 per share.

Including the assumed impact of the convertible notes, our annual EPS guidance needed a full year weighted average share count of approximately 78 million shares. During the first quarter, we repurchased 138,000 shares of our common stock in the open market for a total cost of $10 million. This leaves $240 million available through 2015 for additional stock purchases under our recently reauthorized share repurchase program.

Consistent with our program agreement with Element Financial, we expect to substantially complete the first $1 billion of leased railcar sales to Element during the remainder of 2014, primarily from our current leasing backlog. Since we announced the agreement in December, Element has purchased $619 million of railcars from Trinity. The earnings related to Element in our 2014 guidance remains substantially unchanged. Under the terms of the program agreement, Element is expected to acquire another $1 billion of leased railcars during 2015.

Given our strong financial position, the solid backlog of orders in our major businesses and a solid leasing operations platform, we continue to seek organic and external investment opportunities. During the first quarter, we invested $118 million in 3 previously announced acquisitions within our Energy Equipment Group, and we have a healthy pipeline of acquisition opportunities across the various industries that we are currently assessing. I will now turn to our current outlook for the year 2014.

Our current guidance for 2014 EPS is between $7 and $7.50 compared to our previous full year EPS guidance of between $6.30 and $7. The increase in guidance incorporates the strong performance in the first quarter as well as higher expected results for the remainder of the year due to orders we have received that fill in many of our production lines.

In the Rail Group, our 2014 revenue guidance is between $3.4 billion and $3.6 billion based on our increased railcar delivery guidance. We expect a full year operating margin of between 17.5% and 19% for the Rail Group.

In the Inland Barge Group, we now expect full year revenue of between $605 million and $625 million in 2014, with an operating margin of between 15.5% and 17% for the year, representing a significant improvement in guidance. The orders we have received in the last few months, along with better production efficiencies we are experiencing, have improved our 2014 outlook for this group.

In the Energy Equipment Group, our 2014 revenue guidance is between $880 million and $910 million. We expect the range of operating margin for the year to be between 11% and 12%. The year-over-year improvement in both revenue and operating profit reflects the improved performance of our wind towers business, strong demand for storage containers and the inclusion of results from the recent acquisitions made in this group.

In the Consortium Products Group, we expect full year revenue of between $540 million and $565 million in 2014, with an operating margin of between 12.5% and 14%.

In the Railcar Leasing and Management Services Group, we expect 2014 operating revenue of between $595 million and $625 million and operating profit of between $260 million and $280 million. We expect to deduct between $27 million and $35 million of noncontrolling earnings in 2014 due to our ownership in TRIP and RIV 2013. As we have indicated on previous earnings calls, TRIP and RIV 2013's partnership tax status results in no taxes applied to the amount of noncontrolling earnings deducted from Trinity's income statement.

In addition to the guidance I just provided for the Leasing Group, we expect additional sales of railcars from our lease fleet during the remainder of the year of between $160 million and $175 million, generating operating profit of between $30 million and $35 million. We expect the majority of these additional car sales to be recognized as revenue in the Leasing Group.

For 2014, we expect to eliminate between $825 million and $875 million of revenue and defer between $140 million and $150 million of operating profit due to the addition of new railcars to the wholly- and partially-owned lease fleets. This guidance range also includes Rail Group sales to the Leasing Group that are ultimately filled to Element.

For 2014, we do not expect the net investment in new railcars to consume any cash due to expected proceeds received from leased railcar sales during the year. We expect between $275 million and $300 million of revenue eliminations for other intercompany transactions. To date, approximately $700 million of leased railcars have been filled to RIV 2013. The railcar investment partnership formed last May, in which Trinity holds a 31% ownership interest.

During the second quarter, we expect to complete the final scheduled sale of a group of leased railcars that consumes the remaining equity commitment from the TRIP and RIV 2013 investors. TRIP will purchase the railcars rather than RIV 2013. As a reminder, the 2 entities have the same investors, and for capital structuring benefits, the investors prefer the purchase of this final set of railcars to be made by TRIP.

Full year manufacturing and corporate capital expenditures for 2014 are expected to be between $250 million and $300 million. In addition, corporate expenses are expected to range from $95 million to $100 million for the year as a result of our ongoing business operations and acquisitions.

As a reminder, we are required to report EPS using the 2-plus method of accounting, the result of which should be the reduction of EPS attributable to Trinity by approximately $0.25 per share for the full year 2014 compared to calculating Trinity's EPS directly from the face of the income statement. This is included in our EPS guidance as well. Our full year guidance range reflects earnings per share growth of 47% to 58% compared to 2013 and would result in the achievement of a new level of record annual earnings for Trinity.

We remain very pleased with the focused dedication of all our employees, who are working hard to deliver high-quality earnings and growth during 2014. Our operator will now prepare us for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Allison Poliniak of Wells Fargo.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

James, you threw out a lot of numbers. Can you walk me through so I understand Element, the second sort of $500 million tranche this year. Is that already in backlog? And I think you mentioned something about the leased backlog. I know some of that gets eliminated, but I know Element's not. Can you kind of walk how I should be thinking about that?

James E. Perry

Yes. Let me give you a couple of pieces, Allison. First of all, there's not necessarily $500 million that were scheduled this year. We said we'll complete the first $1 billion. To date, we've done $619 million, so you've got about $380 million left in that $1 billion, and timing will vary quarter to quarter in that, of course. Some of those cars may come directly from our Rail Group, so they'll just be sales within the Rail Group. Some may be existing cars within the lease fleet. There may be cars that move into the lease fleet during the year and are then sold to Element, so they'll be eliminated and then reflected as car sales. We'll provide that geography as the year goes on, but all of those sales, whether they're in the Rail Group or in the Leasing Group, are included in the guidance for the rest of the year.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Okay, perfect. That's helpful. And then just turning to the announcement coming out of Canada about 1 week ago, any thoughts there? I mean, the timeline seems much more aggressive than what the RSI was proposing. Thoughts on how real that number could be. Is there still sort of a comment period on that side?

James E. Perry

Steve, you want to take that?

D. Stephen Menzies

Yes, sure. Allison, yes, we're obviously following this very closely. We're familiar with Transport Canada's actions earlier. And I think we expect that over time, the U.S. and Canadian standards will be synchronized. That's always been the historical pattern. And certainly, as we gain further clarity, we'll provide an update on how we plan to address any regulatory changes. I think due to the fact that PHMSA came out with a more accelerated regulatory process to culminate at the end of September, was certainly trying to accelerate and respond to Transport Canada's actions as well. So yes, we'll continue to follow up and provide updates as we become more clear on what the alternatives are.

Operator

And our next question comes from Eric Crawford of UBS.

Eric Crawford - UBS Investment Bank, Research Division

I guess I'll start with rail. Is there 2014 capacity left that isn't already spoken for? And I guess the real question is, how much upside risk is there to the deliveries guidance that you gave today?

James E. Perry

Steve?

D. Stephen Menzies

Yes, sure. Eric, as I mentioned, we've seen productivity increases in our existing facilities that have yielded some additional capacity. And we have filled orders in some of our open production slots with the freight car orders that we received during the quarter, and I mentioned a new plant that we're expanding that will also be contributing to railcars to be delivered. So we've given a range of 27,500 to 29,000 cars to be delivered yet this year, and we're certainly confident within that range.

Eric Crawford - UBS Investment Bank, Research Division

Okay, fair enough. On covered hoppers, can you speak a bit more as to what you're seeing in the markets there? I mean, you touched on the main buckets, and as a whole, orders have been improving, but there has been some, I guess, inherent lumpiness from quarter to quarter with respect to where the demand is coming from. So I was hoping maybe you could touch on the 3 buckets from an inquiries level and where you see demand headed.

D. Stephen Menzies

Yes. I guess, Eric, when I think about demand in the railcar area, if you look back over an extended period of time, there's always been 1 or 2 car types that are driving the market. So the fact that tank cars are taking a little bit of a respite, and so there's regulatory clarity and that covered hoppers are filling the void, that's not unusual. So I think what we're most encouraged by is the first quarter orders reflected really a broadening of demand. We saw strong demand for small cube covered hopper cars for both frac sand and the construction markets. We see the agricultural market again looking for equipment. Automotive remains strong. And while I don't expect to be building any new coal cars, we've actually seen improved demand in the coal sector, which has been supporting stronger lease rates and lease trends there, so.

Eric Crawford - UBS Investment Bank, Research Division

Okay, great, absolutely. No, great to see and nice to see demand coming back on the dry side of barge, too. On construction, lastly for me and I'll pass it on, but on construction, any preliminary thoughts on the GROW AMERICA Act and how that might impact you guys?

William A. McWhirter

Yes, Eric. This is Bill. Now we're closely monitoring the legislative situation, as you might well guess. We're certainly concerned that it's a punt and we end up back in a situation where we're just doing temporary extensions as we go forward. But we continue to watch it, and we remain ready. Should demand increase, we certainly have the capacity to take care of that demand and our customers.

Operator

And our next question comes from Bascome Majors of Susquehanna.

Bascome Majors - Susquehanna Financial Group, LLLP, Research Division

I know there's a lot of noise in the current quarter and the year as a whole, given your partnerships with RIV and Element, but beyond that -- and the RevPAR backlog is very strong, at record levels, and your visibility into future revenues and your larger segment, accordingly, is reaching all-time highs in the quarter. And can you talk a little bit, a very high level, about your expectations for core demand into 2015 in your key markets, both in railcar and your other businesses? I mean, just stripping all the noise away, where do you see some opportunities for incremental organic growth into next year, beyond the strong conditions you're already seeing today?

James E. Perry

Well, Steve, you want to give him your perspective on, say, the rail, and then maybe, Bill, yours on wind and barge?

D. Stephen Menzies

Sure. So Bascome, this is Steve. Certainly, on the rail side, we do have a strong backlog going into 2015, and it's across the widest breadth of our product lines. We certainly have certain production lines that are not built out for 2015, but what I like is the continuing demand trends. I think freight car demand trends are going to remain solid. And again, I think once we get over this regulatory pause, then we're going to see strong demand for tank cars going into 2015. So I'm very encouraged by what we see, and we've developed our production flexibility so that if there's additional demand to meet, we can do that. Or if we have to flex down, we can do that as well. So I like our positioning for '15, and I like the demand characteristics going into the new year.

William A. McWhirter

Yes, Bascome, on the barge side, I think Trinity really had a great experience in the first quarter of 2014, where we used one of our facilities to convert from tank to hopper, back to tank. And the guys just did a fantastic job really proving out kind of the multipurpose capabilities of our facilities. And so as we look forward into '15, we continue to see opportunity on the tank barge side. I think the dry side will be a little more opportunistic, although recent numbers on the fleet profile suggest that scrapping continues at a higher rate than buying, so the fleet continues to get compressed, which should create some demand. So overall, I'm encouraged for '15 on the barge side. And just quickly slipping into the wind tower side, we've got a really nice backlog in the wind tower business, continue to have kind of strong inquiries in that business, and I like the way the guys are producing their products right now. And I think we've got good opportunity in '15 on wind tower.

Bascome Majors - Susquehanna Financial Group, LLLP, Research Division

And just one more on the acquisition front. I mean, you talked a little bit at a high level about it, and you've certainly outlined your strategy as that's become more important over the last 6 months. But as we get to the point where the cash balance is rising pretty substantially, is it -- during the quarter, can you help us a little bit on sizing up the magnitude of the pipeline and the amount of capital you're willing to deploy towards deals over the next few quarters or even 2 years and the pace at which you would like -- or think you can start to deploy that?

Timothy R. Wallace

Yes, it's Tim. As far as the balance sheet goes, it definitely provides us a great foundation to be able to think small, medium and large as well so we can look at businesses across all those sectors. First off, it's important to remind you that when we look at businesses, we take in consideration our corporate business model that generates value by leveraging the strengths of our businesses within our portfolio. A lot of our businesses, they receive and they share and they generate value through various interactions with each other. So when we're looking for external opportunities, we look for those that will enhance our position of each of our product lines that we have or businesses that are adjacent to our businesses. And so when you see -- you look at the 3 acquisitions that we made in earlier this year, these companies all have a great role in our company in the way that they play off of the competencies that we have and they fit real well. We look to companies that have a heavy manufacturing of steel content. In fact, we like heavy manufacturing as opposed to the lighter manufacturing. We look at businesses that need competencies that we have to offer or we can gain some advantages through some of the supply agreements that we have in the steel area. Right now, our pipeline, as James said in his summary, is fairly robust and full. And so we have an active group, which I'm included, of looking at various businesses.

Bascome Majors - Susquehanna Financial Group, LLLP, Research Division

Okay. And does your full year outlook assume anything on the acquisition front beyond what you've announced in the first quarter?

Timothy R. Wallace

Nothing that we would talk about, Bascome. We've got certain things included in our forecast that we don't detail, but we wouldn't mention anything at this time.

Operator

Our next question comes from Justin Long of Stephens Research.

Justin Long - Stephens Inc., Research Division

Last quarter, you gave the number of DOT-111 tank cars and flammable service in your wholly-owned and partially-owned lease fleets, and I wanted to ask a couple of questions on that. First, did that number change materially with the sales to Element in the first quarter? And second, is there a way to break down how many of these tank cars are in your wholly-owned fleet versus the JVs?

D. Stephen Menzies

Yes. Thanks, Justin, for your question. At the end of the first quarter, our DOT-111 cars and flammable service, both included in our wholly-owned and partially-owned fleets, was approximately 11,300. So that would compare to the number we had given to you previously. I think we disclosed 12,200 in our February call. And at this time, we're not prepared to break out in any further detail the ownership of that number.

Justin Long - Stephens Inc., Research Division

Okay, fair enough. And is there any way you could give any detail on how many of those cars are touching Canada and could be subject to the 3-year retrofit or phaseout that they've discussed?

D. Stephen Menzies

Sure, I can give you a little more detail on that. As far as the A515 tank cars, as I referred to in the duration that was given by Transport Canada, we have approximately 17 of those cars in flammable service, of which 12 have been in Canada recently. And so we're working with our customers there to transition those cars.

Justin Long - Stephens Inc., Research Division

Okay, so it's really small. That's helpful detail. My next question, I was wondering if you could comment on the new railcar pricing environment for both tank and nontank. We heard from another OEM that they've actually been turning down some orders based on price. Did you experience that in the first quarter as well?

D. Stephen Menzies

Well, I'm not sure about the question. We were very pleased with the orders that we took in the first quarter. Our industry continues to be competitive, but I think we're also really continuing to target orders that meet our return requirements and allow us to extend our production runs. And I would say that all the orders we took in the first quarter or virtually all the orders we took in the first quarter supported that strategy.

Justin Long - Stephens Inc., Research Division

Okay, great. And one last one for me. I know you're not building marine barges today, but it sounds like this is a market that's heating up. I was wondering if there's any possibility for you to adjust some of your existing facilities in Inland Barge to build some of the smaller marine barges.

William A. McWhirter

Yes, Justin, this is Bill. As far as the -- what you're calling marine, I guess oceangoing barges, we have the ability to build to the smaller side of oceangoing barges but not to the larger side of oceangoing. We'd have to have a new facility with much bigger docks.

Justin Long - Stephens Inc., Research Division

Okay. And what kind of capacity would you classify the smaller marine barge, just from a barrel standpoint?

William A. McWhirter

Kind of at the 50,000 and less, maybe a little bigger. It depends on the design of the barge.

Operator

And our next question comes from Matt Brooklier of Longbow Research.

Matthew S. Brooklier - Longbow Research LLC

So just a question on -- the deliveries in first quarter saw a sequential decline. Just curious to hear if that was just a function of mix or maybe there was some weather or other hindrances in the quarter.

D. Stephen Menzies

No, Matt. There's -- I would say it was mix. And again, I was very pleased with our production deliveries, and I thought they met our expectations.

Matthew S. Brooklier - Longbow Research LLC

Okay. And then you talked about the Georgia facility where you're going to be producing incremental tank cars. Is that a new facility or that's an existing facility where you're adding production lines?

D. Stephen Menzies

Well, Matt, we actually have several facilities in Georgia and have been producing railcar components at one of those facilities. This is a facility we've owned for a number of years that we're reopening, and we'll be bringing that up to production scale on a very gradual basis.

Matthew S. Brooklier - Longbow Research LLC

Got you. And then do you have a sense for when that facility is online, producing? Is that more a second half '14 event, or is that something that could be more near term? And then maybe provide a little bit of color in terms of the incremental investment needed to get that facility up.

D. Stephen Menzies

Matt, I'm really confident in our team's ability to bring that plan up to speed. I'd prefer not to give specific deliveries for competitive reasons, but the cars that we would expect to see from that facility this year are incorporated into our projections of 27,500 to 29,000 for the year.

Matthew S. Brooklier - Longbow Research LLC

Okay. And can you talk to the incremental investment needed on that facility and kind of the timing of those investments?

D. Stephen Menzies

I'm not prepared to share that.

James E. Perry

Actually, I'd say it's not really material and it's got really quick -- usually has really quick payback. Our internal investments that we've made to increase our capacity has given us tremendous returns.

Matthew S. Brooklier - Longbow Research LLC

Okay. And then for your '14 guide, can you give a little bit of color in terms of expectations for the lease fleet? What's potentially the size of the lease fleet from a unit perspective by the end of the year?

James E. Perry

Yes, this is James, Matt. It's hard to get real precise there. We're going to continue to have sales of cars to Element. We'll continue to add to the fleet. Our leasing backlog is a little over 20% of our total backlog, but we're not prepared to get real precise on where that's going to end up given the timing of some of those transactions.

Operator

And our next question comes from Sal Vitale of Sterne Agee.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

So first question, just a segue on the Georgia facility. Can you give a sense for, once the incremental capacity is added, I mean, what do you -- in terms of numbers, I mean, do you think that's a few thousand in terms of additional tank capacity?

D. Stephen Menzies

Sal, thanks for your question. We really don't provide individual plant capacities and run rates. It's all reflected in our projections for production deliveries for the year, and I think we'll stay with that.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay, that's fine. Just in terms of the opportunity for replacement of the DOT-111s, there are varying estimates. How do you consider the universe of cars that could potentially be replaced? So do you just look at, say, the current DOT -- well, I should say the prepetition DOT-111s that are carrying, say, crude and ethanol, which is about in the mid 50,000s, let's call it 56,000? Or do you look at the entire universe of the DOT-111s that are carrying hazardous materials, which is more like between 150,000 and 160,000?

D. Stephen Menzies

Well, if I understand your question, Sal, I think the regulatory process is particularly focused on railcars operating in flammable service, so that's where our focus has been, and I think the numbers that the RSI last had in late September were about 85,000 of those cars. So we've told how many numbers that we have in our fleet, and we're certainly focused on transitioning those cars and modifying them, if that's what the appropriate action is, if the economics support that and the regulations support that. And where it doesn't, we feel pretty confident there's going to be a replacement demand for cars that meet any new specifications or regulations. The investments that we're making that I talked about earlier, I think, give us the flexibility to respond to both increased demand for new railcars and to be able to support modifications and regulatory compliance with our own fleet.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay. That's helpful. And then the numbers you mentioned earlier, you said there are currently 11,300. Those are, I guess, the DOT-111s in your lease fleet. And that compares to, say, 12,200 a quarter ago. I remember a figure you mentioned a quarter ago of 9,600. Those are the bad faith cars. What is that level? What -- how many bad faith cars are in your fleet now?

D. Stephen Menzies

Yes, I don't -- we don't have anything in our fleet that's bad faith. We have good faith cars, but we haven't broken out the 11,300 into different categories.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay, that's fine. So then the other question is just to get a clarification on your guidance. You had said the additional sales of cars in the lease fleet of 160 to 175 and profit on that of $30 million to $35 million. Is the 160 to 175, are those above and beyond the sales to ESN and to Element, or is that inclusive?

James E. Perry

No, it's simply above and beyond what we did in the first quarter, so that would include the sales that we have scheduled to Element for the rest of the year.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay. So the 160 to 175, that's assumed to be sales of cars that you've held for less than 1 year, which you recognize as revenue, correct?

James E. Perry

The majority of those would be.

Operator

And our next question comes from Tom Albrecht of BBT.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

I appreciate all of the numbers and everything, but sometimes I get lost, so I want to clarify a couple of things. So I don't know if it was Steve or James, you talked about there could be some margin issues for the rest of the year in the Rail Group. Was that primarily because of the opening of the Georgia plant and the start-up cost, or is it because, as the production mix becomes maybe a little bit less tank, the margins would naturally maybe not stay at that 19.5% level?

James E. Perry

Well, I think we've given guidance of 17.5% to 19%, and that was consistent with the first quarter. We've raised our revenue guidance, so the overall profit dollars are significantly higher with the new guidance. Steve did mention a little bit of headwind as we go through some expansions-type things. Mix will always change throughout the year. So again, the margin guidance hasn't changed much, but the dollars have moved up quite a bit on the new delivery guidance that Steve provided.

D. Stephen Menzies

And just to add to James' point. In addition to start-up costs for our Georgia facility, we're also making investments in our maintenance services, which had some adverse costs associated with that, that impacts margins in the balance of the year.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

So those 2 factors, Georgia and the investment in the maintenance services, would be the bigger headwind, if you want to use that term, as opposed to changing mix on the production?

James E. Perry

Yes, I think mix has probably a better impact on the rest of the year, and that's what we had forecasted before. Again, our margin guidance hasn't changed. As we go through the year and see which cars are coming through our production facilities, I think mix is probably the bigger piece, but we're not prepared to break out in a lot of detail the distinction between the pieces.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Okay. And then in terms of a second quarter production, I know your production was off in the December quarter, but you had actually guided to that -- no, I think someone may have forgotten about that. But should we be thinking about -- I know what you've given for the full year, but in terms of just kind of an immediate ramp-up, kind of more of the same, around 7,000 for the second quarter?

D. Stephen Menzies

Yes. I think, Tom, we've given the annual guidance and we'll stay with that. I really don't want to have to be going quarter to quarter on guiding deliveries and -- but again, I think we're confident in the range we've provided for the year.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Okay. And then, James, you gave a number of $619 million that you've done with Element so far. Is that inclusive of April? Because the press release talks about $514 million.

James E. Perry

No, that's from December, when we initiated the agreement with Element, through the end of the first quarter.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Okay. I wasn't sure which extra month it included.

James E. Perry

Yes, that was the original $105 million we did in December plus the little over $514 million we did in the first quarter, Tom.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Okay. And then just on your guidance, there were a couple of things I missed. Revenue eliminations were $800 million to something. Was it $800 million to $850 million?

James E. Perry

$825 million to $875 million during the year.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Okay. And then other revenue eliminations were $270 million to something?

James E. Perry

$275 million to $300 million, and that's the nonleasing-related eliminations we have. And as a reminder, Tom, we'll file these remarks very shortly after the call, so you'll have all the numbers. We're happy to walk you through them.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Okay. And then I guess just one last question. I mean, you had tremendous incremental margins from the December quarter into the March quarter even though you delivered about 390 fewer cars. Just in your opinion, what was the biggest influence on either the incremental margin being over 500% or the fact that the absolute margin rose 110 basis points?

James E. Perry

This is James, Tom. I think as you look at good pricing on the cars that we produce, we continue to see that as they've come through the backlog. I think the employees at the plants are doing a great job with getting their manufacturing efficiencies through the operational flexibility we have. We've really seen the margin increase quarter-over-quarter. And again, as we said, we project a very good margin the rest of the year for the same reasons.

Operator

And our next question comes from Kristine Kubacki of Avondale Partners.

Kristine Kubacki - Avondale Partners, LLC, Research Division

I'm going to ask a little bit bigger question, going back to the regulation side. On PHMSA, it seems like they've laid out here recently a wish list in the car design coinciding with what AAR was proposing on the shelf thickness, full-height head shields, thermal protection and jacking. I guess, can you give us some thoughts, that if that comes to fruition, how this would impact the backlog, the backlog that's already there? Am I wrong to think about, given that we're finally going to get some design certainty, that we would see an increase in the existing backlog pricing as we incorporate those design changes and the new car pricing obviously will be going up in the future on those tanks going into crude methanol?

D. Stephen Menzies

Thanks, Kristine. Steve. You asked a lot of questions in there. And certainly, I think a possible outcome of regulatory change is increased demand for tank cars, new tank cars to be built. And as we continue to have strong backlogs and new tank cars, that raises -- it gives us greater ability to raise prices. As new tank car prices rise, it also gives us the ability to raise existing car lease rates as well. So I think all those are positive in the long term, but certainly, a lot of details to figure out on what comes through in regulations and investment returns and lease rates and how the market is going to accept those lease rates and investments and modified cars. So there's just a lot to deal with, and we have to really sit down and understand what the final regulations are to be able to develop our plans. And we'll certainly share those with you when that becomes available.

Kristine Kubacki - Avondale Partners, LLC, Research Division

Okay. I guess I would assume then, if you had a, say, a CPC-1232 in the backlog and it was going for crude service, that with those design changes, then probably you would be able to incorporate any new design that they start to mandate and that pricing would be incorporated?

D. Stephen Menzies

I'm not sure. We'll take a look at things when they become more clear. But that's highly speculative, and it's difficult to respond.

Operator

Our next question comes from Bill Baldwin of Baldwin Anthony.

William L. Baldwin - Baldwin Anthony Securities, Inc.

Two questions. I guess, first, Steve, with the uncertainty regarding the regulations, are you seeing any of your customers that have backlog defer in delivery, saying, "Let's wait and see what happens here before we take delivery of our tank cars"?

D. Stephen Menzies

I think I mentioned in my comments, Bill, that like us, people want to make good investment decisions and understand clearly what equipment to invest in, and that's pretty hard to do in this regulatory uncertainty. I think we're going to have some clarity here towards the end of the summer. And we're certainly going to work with our customers to assist them in being able to build the right cars for their fleet and lease the right cars for their business. And we're just going to have to be flexible working with our customers to make that happen. But I think that adds some flexibility.

William L. Baldwin - Baldwin Anthony Securities, Inc.

Exactly. Yes, just a -- kind of an unusual environment really at this point, with all this going on like it is. And many different people involved, too. So many different organizations.

D. Stephen Menzies

Well, that's right. And I wouldn't want to be in this position for a long time. But again, I think by the end of the summer, we'll start to have some clarity, as outlined in PHMSA's schedule.

William L. Baldwin - Baldwin Anthony Securities, Inc.

Yes, yes. I hope the regulatory people understand the importance of keeping this process moving. Secondly, Bill, acquisition of these cryogenic companies, cryogenic tank manufacturing. Can you give some color as to the markets that you think these tanks will basically be serving to the markets they'll be going into over the next several years?

William A. McWhirter

Sure, Bill. So we really think about cryogenics in a couple of buckets, just kind of atmospheric gases but then LNG. And so as we look at the markets broadly for LNG, a lot of expansion particularly in the transport side. And that can be traditional transport trailers, but it can also be ISO trailers, serious movement of LNG into the infrastructure to fuel motor vehicles, the potential for fueling locomotives and, certainly, the potential for fueling tows for barge lines. So we see a lot of opportunity across Trinity's broad spectrum of products, and acquiring that technology to complement what we already had in Mexico, really kind of the anchor for what we think could be really nice growth.

William L. Baldwin - Baldwin Anthony Securities, Inc.

And kind of in, I guess, that same vein, a little different product category, but can you talk to us about what Trinity is doing, if anything, really in the compressed natural gas storage markets? And how you see those markets unfolding?

D. Stephen Menzies

Yes, Bill. We do a little bit of work in the compressed side. We have done some prototyping in the compressed side, but typically right now, we're a little more focused on the liquid side. But we certainly have the capabilities to participate in the compressed side.

Timothy R. Wallace

Bill, this is Tim. We also manufacture the heads that are used in the -- to build the spheres in the CNG business, and that is a competency that is easily leveraged into that business because if you're building those vessels, steel, I think, is 2.5 to 3 inches thick, and there's not that many people that have the capability of making the heads that go on those vessels. So we're serving that market right now.

William L. Baldwin - Baldwin Anthony Securities, Inc.

Yes, as I recall, that's why you got in the tank car business years ago.

Timothy R. Wallace

Well, most of our businesses have evolved. It's just businesses that are adjacent to our core businesses, and then they grow from there. That -- it's very fascinating for us and very exciting for us.

William L. Baldwin - Baldwin Anthony Securities, Inc.

It is. How do you see the compressed natural gas markets evolving? I mean, is it really very fuzzy right now, or is there some clarity about what might be going on there?

Timothy R. Wallace

Well, I think you've got compressed natural gas currently being used by a lot of the large commercial companies that have local vehicles that will be using them, like school buses and other buses and delivery vehicles and things like that. And the compressed natural gas industry is trying to spread that out to where the longer-haul trucks and -- would either go LNG or compressed natural gas in that particular area. But then they've got to put in the infrastructure, and there's a lot of capital being raised to put in infrastructure in these areas.

Jessica L. Greiner

Okay. It looks like we have no more questions. That concludes today's conference call. A replay of this call will be available after 1:00 Eastern Standard Time today through midnight on May 7, 2014. The access number is (402) 220-0118. 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.

Operator

And this concludes your teleconference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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