Trinity Industries' (TRN) CEO Timothy Wallace on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Trinity Industries (TRN)

Trinity Industries (NYSE:TRN)

Q2 2014 Earnings Call

July 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

Analysts

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

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Justin Long - Stephens Inc., Research Division

Bascome Majors - Susquehanna Financial Group, LLLP, Research Division

Matthew S. Brooklier - Longbow Research LLC

Eric Crawford - UBS Investment Bank, Research Division

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

Derek Rabe

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

Operator

Good day, everyone, and welcome to today's program.

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

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

It is now my pleasure to turn the conference over to Ms. Gail Peck. Please go ahead.

Gail M. Peck

Thank you, Keith. Good morning, everyone. Welcome to the Trinity Industries' Second Quarter 2014 Results Conference Call. I'm Gail Peck, Vice President, Finance and Treasurer of Trinity. Thank you for joining us today.

Following the introduction, you will hear from Tim Wallace, our Chairman and 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 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 pleased with our financial results for the second quarter. Our businesses continue to do an outstanding job of driving operating leverage and efficiencies to the bottom line. We're also continuing to make great progress in the business development area.

In late June, we announced an agreement to purchase assets of Meyer Steel Structures from Thomas & Betts Corporation. This transaction demonstrates our commitment to strengthening our portfolio of diversified industrial companies.

Our Rail Group generated strong financial results in the second quarter and increased its order backlog to a new record level. Our rail businesses continue to make investments that expand our operating flexibility and capacity to respond to various market conditions.

Our Railcar Leasing and Management Services Group delivered another quarter of solid operating results. In addition, this group continued to execute railcar transactions that enhanced profitability and generated cash.

I'm pleased with our Inland Barge Group's financial performance during the second quarter.

The profitability of our Construction Products Group improved during the second quarter compared to the same period last year.

Our Energy Equipment Group continues to show improved financial performance. I'm pleased with the progress we're making in integrating the 3 businesses we acquired in the first quarter. We're optimistic about the long-term opportunities for growth in the cryogenic industry.

Trinity remains uniquely positioned to provide a variety of transportation and storage products to the oil, gas and chemicals industries. We complete -- once we complete our acquisition of Meyer, Trinity's utility structure business will be positioned as a leader in this industry. We're continuing to review acquisition opportunities in the energy and infrastructure markets and have products -- that have products, services, technology and competencies that will enrich our portfolio of industrial manufacturing businesses.

Trinity's financial performance during the second quarter, along with our pending acquisition of Meyer, represents additional progress toward attaining our corporate vision of being a premier diversified industrial company. Over the short-term, our goals are to continue operating our company on lean principles while providing superior products and services to our customers. We are focused on creating shareholder value through a variety of organic improvement and growth initiatives, as well as identifying manufacturing acquisition opportunities. We expect to continue to conduct Railcar Leasing and other asset transactions that provide earnings and generate cash. Trinity's future remains bright. Our financial health is strong 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. We are pleased with the recently announced agreement to purchase the assets of Meyer Steel Structures, which is proceeding through the regulatory review process and is expected to close in the third quarter pending approval. The acquisition of Meyer provides Trinity a market-leading position in the North American utility steel structures market. Meyer's strong engineering reputation, manufacturing capabilities and products with high steel content align well with Trinity's existing competencies and offer enrichment opportunities to create additional value. We are optimistic about the long-term outlook with infrastructure investment in North America for electricity transmission and distribution.

Reliability concerns, increasing need for renewable energy interconnections, congestion and government oversight are all-important long-term demand drivers. Over the next decade, we also expect Mexico will continue to develop and expand its infrastructure. Combining Meyer with Trinity's existing capabilities, positions us well to serve this market.

During the second quarter, the Energy Equipment Group set another record for quarterly revenue and increased its operating profit by 98% over the second quarter last year. Revenues and profits increased primarily due to higher shipments of storage containers serving the energy sector, as well as higher deliveries and improved operational performance in our wind tower business. During the quarter, we received $213 million in wind tower orders, resulting in a backlog of $611 million at the end of the quarter. Our production visibility in wind tower business now extends into 2016.

I am pleased with the progress we are making integrating our recently acquired companies within this group. We continue to invest resources to identify and pursue opportunities to add new businesses to our industrial portfolio and expand our reach in the markets we are pursuing, enhance our competencies and complement our product offerings.

Moving to our Construction Products Group. Revenue was relatively flat as compared to the same quarter last year. A more favorable product mix drove an increase in operating margin to 13.1% during the second quarter after excluding a $2.6 million gain reported this year, resulting from the early retirement of certain acquisition related liabilities. This compares favorably with a margin of 12.3% in last year's second quarter. I am pleased with the companies -- with the performance of this group considering conditions in the highway business remain challenging due to uncertainty regarding the upcoming expiration of the Federal Highway Bill. We continue to see strong demand in the Texas construction market, which is a good indicator of overall demand for our Aggregates business.

We also increased our U.S. galvanizing capacity and geographic reach during this quarter with a small acquisition of an additional facility in West Texas. We are currently defending the company in the False Claims Act complaint related to our Highway Products business. The trial began on July 14, and ended in a mistrial on July 19 of this year. The company intends to vigorously defend itself against the allegations. Our second quarter 10-Q, which will be filed this morning, will provide more information on this matter.

Moving to our Inland Barge Group. During the second quarter, the Inland Barge Group reported a 48% year-over-year increase in operating profit, primarily resulting from a change in product mix. We received orders totaling approximately $124 million in the quarter, resulting in a backlog of $467 million at the end of the quarter. Our production visibility in this business stretches into 2015. We are optimistic that inquiries for hopper barges will increase as stronger exports of corn, wheat and soybeans, as well as replenishment of coal stock piles for the summer cooling season are expected to increase barge traffic along the inland water ways. The outlook for the fall harvest is also very good.

Demand drivers for tank barges continue to be favorable with backlogs in the industry stretching into 2015. Barge operators have absorbed a significant amount of new equipment in their fleet while maintaining high utilization levels. As infrastructure investments in the energy sector are completed, we expect additional expansion in downstream markets resulting in rising shipments with chemical and petrochemical commodities. We expect a need for additional barge equipment to increase as a result.

I am pleased with our barge group's ability to respond to various demand drivers and generate efficiencies within the plants. This group's operational flexibility is a key differentiator, enabling us to enhance profitability and respond to our customers' needs.

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

D. Stephen Menzies

Thank you, Bill. Good morning. I'm very pleased with the strong momentum in Rail and Leasing Groups. Our focus and execution continued to enhance Trinity rail's position, as a premier provider of railcar products and services, and are responsible for our record financial performance during the second quarter. This is a very exciting time for TrinityRail. Railcar demand is broadening, fleet replacement opportunities are beginning to materialize and demand catalysts from the North American energy renaissance remains strong. Our business is growing and our integrated manufacturing and leasing platforms are responding effectively to increasing railcar demand.

North American industry railcar orders in the quarter were very strong and reflected a particularly healthy mix of freight car orders. The 33,900 rail cars ordered during the second quarter drove the industry backlog to its highest level in the last 25 years. The current backlog approximates 100,000 rail cars, representing approximately 6 quarters of industry production of current rates. During the second quarter, TrinityRail received orders for 9,880 new rail cars including tank cars, covered hoppers and auto racks, with orders received from railroads, third-party lessors and industrial shippers. Our orders during the quarter aligned very well with our production plans. Our backlog increased to 45,350 rail cars with a record value of approximately $5.5 billion.

Order inquiry levels continue to be steady thus far in the third quarter and reflect continuing demand for a wide variety of freight cars. Order inquiries for tank cars remain steady with some order activity for tank cars for flammable commodity service is on hold pending new regulatory standards. However, with extended production backlogs, some customers are beginning to place orders with us recognizing that with our production flexibility we're able to amend our tank car buildings specifications to the most current regulatory standards at the time of production.

We continue to closely monitor the regulatory actions of PHMSA, the U.S. Department of Transportation and Transport Canada, with respect to changes in railcar designs for tank cars and flammable service. And as you may be aware over last few weeks with the U.S. Department of Transportation and Transport Canada, took meaningful steps within their respective regulatory review processes toward making changes impacting the transportation of crude oil, ethanol and other flammable products.

While we are gaining additional insights into the direction of new regulations, there is still a great deal of uncertainty and the regulatory process -- regulatory processes still have much further to go before final rules are issued. We continue to study both regulator's actions, directions and comments and we will continue to be engaged in the industry's dialogue. In anticipation of the new regulations, we are making preparations to build to newly developed tank car specifications as well as to potentially modify existing tank cars and flammable service.

TrinityRail is a leader in railcar design, railcar production and customer service. Our team will be well prepared to manage the eventual regulatory outcome and help ensure that our customers railcar fleets, as well as, our own lease fleet comply with industry safety standards.

We're actively investing capital in our rail business in response to growth opportunities, as we expect demand to increase as a result of the new tank car regulations and continued favorable industry fundamentals across all railcar types. I am pleased with the progress we are making to incorporate our flexible manufacturing asset base into our Georgia facility, positioning it to be a multiproduct railcar production facility.

In addition, we are making other investments in our production facilities to enhance our operating flexibility. During the quarter, we also continue to invest in our maintenance services business by acquiring a facility in Arkansas. We expect this facility will be in operation by year end and be well positioned to support market reaction to revise tank car regulations, and we are expanding capacity at our other 4 maintenance service facilities to enhance our ability to support increased tank car maintenance requirements and potential modifications of our lease fleet and the fleets of key industrial shippers.

Our Rail Group produced our sixth consecutive record quarter of operating profit. I'm very pleased with our improvement in operating margins, although, we anticipate some margin headwinds in the second half of the year due to product mix changes and startup costs from our investments in manufacturing and maintenance services facilities.

Our record $5.5 billion order backlog comprised of a broad product mix with increasingly better pricing across most railcar types, positions us to realize benefits from extended production runs into 2015 and 2016. During the second quarter, the Rail Group delivers 7,160 rail cars bringing our year-to-date total to just over 14,000. As a result of the orders received in the quarter and further production increases, our 2014 unit deliveries are now expected to be in the range of 28,500 to 29,500, an increase from our previous guidance range of 27,500 to 29,000. This range of deliveries represent a new record level of production.

During the second quarter, our Leasing Group took delivery of approximately 1,280 new rail cars. Our total lease fleet portfolio including partially owned subsidiaries now stands at approximately 73,760 rail cars. At the end of the quarter, 20% of the units in our railcar order backlog with a total value of $1.1 billion were committed to customers of our leasing business. During the second quarter, our Leasing Group earned a record operating profit from operations due to strong market fundamentals and new additions to our wholly-owned lease fleet. Fewer existing idle rail cars, extended production backlogs for both tank and freight cars and rising railcar prices are driving strong lease renewal rate increases across most railcar types.

Our lease fleet utilization at the end of the second quarter was 99.7%, up from 98.7% last year. I'm very pleased with our sustained high level of fleet utilization and a strong renewal rate increases our team continues to achieve each quarter. We continue to sell railcars from our lease fleet to manage portfolio diversification and generate cash when market conditions are favorable. Selling rail cars from our lease portfolio to institutional investors is an important strategy for TrinityRail. Portfolio sales also provide opportunities to serve institutional investors seeking investment in leased rail cars, in addition to serving our industrial shipper customers with our leasing services.

As we originated the lease, we have the flexibility to retain it in our wholly-owned fleet, shared in the investment with third-party equity investors like RIV 2013, or sell the railcar with the lease while continuing to manage the railcar and the lessee commercial relationship as we are doing with Element Financial. We are in conversations with a number of institutional investors, looking to make investment of these rail cars. Having access to diverse sources of debt and equity capital provides the financial flexibility to grow the leasing business in addition to generating capital for Trinity's portfolio of industrial companies. We have had considerable success in growing our leasing platform and expanding our access to capital to support our lease origination capability.

During the last 12 months, our Leasing Group has originated approximately $1 billion in new railcar leases as a result of the strong lease origination platform. I continued to be very pleased with the operating performance and achievements of our Rail and Leasing Groups. The focused efforts of our dedicated TrinityRail team to build upon our operating and financial flexibility will continue to drive strong performance levels of our businesses. The investments we are making position us to benefit from the strong market demand dynamics and pending resolution of tank car regulatory uncertainty.

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

James E. Perry

Thank you, Steve, and good morning, everyone. Yesterday, we announced strong results for the second quarter of 2014 with revenue of nearly $1.5 billion and earnings per share of $1.01, compared with our revenues and EPS of $1.1 billion and $0.52 during the second quarter of 2013. Please recall that we completed a 2-for-1 stock split in June, so all figures have been adjusted accordingly. Our tax rate for the second quarter was 32.6%, which was lower than the guidance of 34% for the final 3 quarters of 2014 that we provided on our last conference call. This was primarily due to the benefits of certain domestic, manufacturing deductions, lower state taxes and the partnership tax status of our noncontrolling interest.

The company's convertible notes had a dilutive impact of $0.04 to EPS during the second quarter. Please refer to the EPS schedule provided in our press release yesterday for the dilution calculation.

In the second quarter, we reported approximately $2 million of one-time costs at the corporate level related to the pending asset purchase of Meyer Steel Structures, which we expect to close during the third quarter. During the second quarter, we also announced the successful completion of the $1.1 billion leasing joint venture initially formed in May of 2013. The joint ventures acquisition of approximately $388 million worth of railcars substantially utilized all of the remaining equity capital that was committed last year by TILC and our coinvestors, including [indiscernible] performed RIV 2013 and complete the recapitalization of TRIP. Our partially owned subsidiaries, RIV 2013 and TRIP, now own a combined portfolio of approximately $2 billion in leased railcars.

During the second quarter we repurchased 63,600 shares of our common stock in the open market for a total cost of $2.5 million. Year-to-date, we have repurchased $12.5 million of common stock, which leaves $237.5 million available under our current program through the end of 2015 for additional stock purchases. We reviewed a number of factors in establishing the level of share repurchase that we make. We strive to allocate our capital in ways that will increase shareholder value.

I'll now discuss our current outlook for the remainder of 2014. As provided in our press release yesterday, our guidance for 2014 annual EPS is $3.90 to $4.10, which compares favorably to our prior-year guidance of $3.50 to $3.75. We have solid earnings expectations for each of our business segments in 2014. The new guidance level reflects the strong results in the first half of the year, additional orders received for production in 2014, and higher levels of efficiencies in many of our production facilities.

Note that our annual EPS and Energy Equipment Group guidance do not include any impact from the Meyer asset purchase due to uncertainty with respect to the timing of closing, as well as, certain accounting analysis that will be completed following the closing.

Our current EPS guidance for 2014 assumes a weighted average diluted share count of 157 million shares, which includes 6.4 million shares from the convertible notes. The dilutive impact assumes the recent $45 stock price for the remaining 2 quarters and reduces earnings by approximately $0.17 per share. In 2014, we expect our Rail Group to generate revenues of $3.6 billion to $3.75 billion with an operating margin of 18% to 19%. We will have some margin headwind in the second half of the year due to product mix changes as well as startup and ramp up costs in certain manufacturing and maintenance services facilities. We expect our Leasing Group to record operating revenue of $620 million to $635 million with operating profit from operations of $270 million to $285 million. In 2014, we also expect the Leasing Group to sell approximately $665 million to $690 million of leased railcar from the lease fleet, of which $425 million to $450 million will be recorded as revenues. The total operating profit associated with these sales is expected to range between $205 million and $215 million.

We expect our Construction Products Group to record revenues of $540 million to $565 million with an operating margin of 13% to 14.5%. Our Inland Barge Group is expected to have revenues of $640 million to $660 million with an operating margin of 16.5% to 17.5%. We expect our Energy Equipment Group to produce revenues of $880 million to $910 million with an operating margin of 11.5% to 12.5%. Corporate expenses are expected to range from $100 million to $110 million for the year as a result of our growing business operations and acquisition as well as certain legal expenses.

For 2014, we expect to eliminate between $720 million and $745 million of revenue and defer between $130 million and $140 million of operating profit due to the addition of new railcars to the wholly and partially-own-to-lease fleets. This guidance range also includes certain Rail Group sales to the Leasing Group that are ultimately sold to Element.

We expect between $310 million and $330 million of revenue eliminations for other intercompany transactions. We expected to deduct between $30 million and $35 million of noncontrolling earnings in 2014, due to our ownership in TRIP and RIV 2013. As we've 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. For the purposes of the calculation of guidance EPS, we are assuming a tax rate of 33% for the remainder of 2014.

As a reminder, we were required to report EPS using the two-class method of accounting, the result of which should be the reduction of EPS attributable to Trinity by approximately $0.14 per share for the full year 2014 on a split adjusted basis 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 ranges reflect year-over-year revenue growth of approximately 30% to 40% -- 30% to 35%, with earnings per share growth of approximately 60% to 70% compared to 2013. As it pertains to cash flow, we do not expect the net investment in new railcars for 2014 to consume any cash due to expected proceeds received from the leased railcars sales during the year.

Full year manufacturing and corporate capital expenditures for 2014 are expected to be between $250 million and $300 million. We remain very pleased with the focused dedication of our employees, who are working hard to deliver high-quality earnings and growth during 2014. We continue to seek both internal and external growth opportunities for future years. The Meyer asset purchases is a great example of our acquisition strategy and we believe our balance sheet, expected cash flow and access to the capital markets if needed, provide us with sufficient resources to pursue additional growth. We are confident that our team will continue to be successful identifying opportunities and integrating acquisitions into our portfolio while maintaining a premier level of performance in our existing businesses.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Allison Poliniak with Wells Fargo.

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

Just going back to the comments on maintenance, if I remember correctly, your prior shops were mainly committed to your leasing business. It sounds like the newer ones are not, could you just give me a little color and if that's sort of a little bit of a change for you guys?

Timothy R. Wallace

Steve?

D. Stephen Menzies

Allison, our maintenance services business has been principally focused on our leased fleet, as our leased fleet has grown, our maintenance requirement continue to grow as well. So we are looking at the long-term demand characteristics of our fleet and positioning our maintenance services facility to be able to support that, to the extent that we have additional capacity and scheduling permits we want to be able to support key industrial shippers in that business as well.

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

Okay. That's great. And then on the capacity question, Steve you mentioned that we're in new territory in terms of deliveries. Do you guys still have enough -- I know it's obviously, a fluid question, depending on what's being asked to produce, but is there still opportunities that for you guys to increase capacity on the rail side if need be?

D. Stephen Menzies

Allison, Steve, again. Yes, obviously, for competitive reasons, we don't want to discuss our plans and specifics of manufacturing capacity, but I think we've demonstrated that our capacity is very flexible and can be shifted across our business portfolio of products not just within rail as well. So I'm confident that as we continue to assess demand characteristics, we have adequate capacity to be able to respond.

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

Great. And then, just last on the barge, you talked a little bit about hoping that mix is changing and hoppers are coming back and are you starting to see that now? And then, I guess, just on the margin side, what kind of headwinds are we expecting for it to drop so meaningfully for the balance of the year?

William A. McWhirter

Yes, Allison. This is Bill. So I think on the inquiry side, we're feeling very good about the general inquiry nature on the hopper side of the business, particularly as we mentioned, both -- scrap prices are up. There's a lot of movement of corn, wheat and soybeans. The harvest once again looks good and we are seeing an uptick and even coal moving as well, so overall it looks good. As we said on the margin side, it's always a function of product mix, so it's -- so what barges are you building in any one particular quarter as well as the conditions at which time those orders were taken. So can't get into a lot of specifics associated with that, but the back half margin a little lower than the front half margin.

Operator

And we'll take the next question from Steve Barger with Keybanc Capital Markets.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Bigger picture question first. Tim, will your management team models out the infrastructure build dollars coming into transportation and storage products that you either can participate in or hope to get involved with, can you quantify the size of those opportunities you see in dollars and talk about how you think about end market visibility in terms of years?

Timothy R. Wallace

No. We can't quantify the dollars, but what we do is we look at the various businesses that we have in our portfolio and each of our business leaders looks at it from an ecosphere point of view and tries to identify the business opportunities that are in front of them and then we get together and talk about the entire industry spectrum, and the products that are in those spectrums that we could potentially manufacture and then the companies that are in that, that manufacture those products and we look at it on an industry in a market by market case, tied back to our businesses and then we look at how they overlap with the other businesses that we have from a manufacturing flexibility point of view. So that's more or less the basis of what our strategic planning and growth process looks like.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Well, you've done the cryogenic acquisitions and now you're pursuing -- you announced the Meyer deal. Looking forward to other acquisitions in those specific spaces or should we expect to see a broader product build out? How are you thinking about the opportunities in front of you?

Timothy R. Wallace

Well, we're really an opportunistic company, and it's a matter of businesses that are up for sale or in the marketplace is one group that we look at. And then, it's also businesses that we planted seeds with over a period of time that would begin to harvest as far as the idea of us acquiring them, and/or a lot of networking and relationships that we have, so it's very opportunistic and it also is tied to the quality of the fit of the particular business within our portfolio.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Steve, are you seeing customers come to you placing multi-year or blanket orders or are the inquiries and orders coming in bigger blocks, giving whether it's the regulatory changes or what looks like increasing demand for freight cars?

D. Stephen Menzies

Steve, yes, we have customers, who want to look at their long-term purchases, particularly with extended backlogs, I think that's becoming a little more prevalent historically, if you get a rail car in 6, 9, 12 months. That's not the case now, so it forces customers to look more long-term. Certainly, we'll entertain long-term agreements to the extent they make sense and they have proper pricing mechanisms and hedges towards rising costs.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

And given the increasing volume of freight orders, are you seeing pricing starting to firm up on that side of the business?

D. Stephen Menzies

Absolutely, as I mention, we've got a backlog of -- the industry backlogs a little over 6 quarters in freight car production and fairly wide swaths of rail car types and truly we're seeing pricing firming and increasing as those backlogs extend. There are really no existing idle cars available today. I think the AAR reported their idle count as the lowest it's been since they started taking account. So all that bodes very well for good strong pricing environment.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Got it. And last question for you, James. When I look at your balance sheet, your net cash on the manufacturing side, very conservatively levered on the leasing side, as you mentioned you're going to be generating a lot of operating cash flow. I know Trinity will continue to look for acquisitions, but do you see anything out there trading at a more attractive multiple than your own stock and should we expect you to remain active on the buyback?

James E. Perry

Well, I think, as I said in my script, and this is James P, thanks for the question. We look at capital allocation on a quarter-by-quarter annual basis with our Board of Directors as well. We're looking at a lot of organic investment with the manufacturing CapEx we have of $250 million, $300 million. We've been active in the stock buyback over the last year or so, we've raised our dividend multiple times and we've clearly been active on the acquisition side. But to your point, we do have a lot of cash on the balance sheet. We continue to generate cash flow, we will use some of that with the Meyer acquisition, the cash on hand, but we do continue to have a very strong balance sheet to pursue all of the above type strategies as we see opportunities.

Operator

And we'll take our next question from Justin Long with Stephens.

Justin Long - Stephens Inc., Research Division

Over the first half of the year, the rail car order environment was clearly very strong, but I was curious as you look into the second half, do you have confidence that the industry backlog can continue to build from these levels just based on the inquiry levels that you're seeing in the market today or do you think there's a chance we could see a little bit of a pause in order flow?

Timothy R. Wallace

Steve?

D. Stephen Menzies

Justin, this is Steve. As I said in my script, we're seeing very steady order inquiry levels of both tank and freight cars coming into the third quarter. I look long-term as the fundamentals from the energy renaissance. I look at the broader markets and then see a continuing strong demand. Short of geopolitical events, which obviously, we don't control, I would expect we're going to continue to operate in a strong rail car environment.

Justin Long - Stephens Inc., Research Division

Okay, great. That's helpful. And I know you guys won't give guidance on 2015 yet, but just high level, if I look, you have 45,000 railcars in your backlog today. At this point, do you feel like you have enough visibility to say that your deliveries will be directionally higher next year?

James E. Perry

Justin, this is James. I'll take that one. We clearly do have the strong backlog across our business lines. We have about $6.5 billion when you combine the backlogs in the major business that we disclose, that does give us this visibility well into 2015, and beyond in certain product lines, we're not in a position at this time to give direction on our production levels in our different business services or earning levels. But as Tim said, we do have positive momentum. The investments we have been making are resulting in nice margins. We continue to have good order inquiries and orders come through in the businesses. So we do look forward to later as we move along providing more insight into 2015 and '16, but for now, we're focused on our guidance for 2014.

Justin Long - Stephens Inc., Research Division

Okay, fair enough. And then, one last one from me, if you don't mind. I wanted to ask about the Meyer acquisition. Is there any detail you can provide in terms of the margin profile of this business and the earnings impact you expect once maybe on an annual basis once this is closed. And then along those lines anything you could speak to in terms of the synergy opportunity as well would be helpful.

Timothy R. Wallace

James?

James E. Perry

Sure, this is James, Justin. One thing we did disclose in our press release previously is the revenue run rate for 2014 for Meyer on a standalone basis. It was about $325 million. We're not able to provide any margin guidance at this point, I'll mention a couple of things, one is we need to finish the acquisition during the third quarter for that business. As we look at enrichment opportunities, we do believe they will be there flowing both ways between our companies. We'll also point out and will disclose later in the years, we're able to close the acquisition, but accounting adjustments we need to make through purchase price accounting and so forth. So historically, the businesses had healthy margins, we believe in that going forward, but as Bill said, there's a lot of demand drivers there that we'll get our arms around as we absorb the business.

Justin Long - Stephens Inc., Research Division

Okay, great. And then, maybe on the synergy opportunity, anything you could speak to there, just high level?

James E. Perry

We really can't provide you any specific what you would call synergies, we really use the term enrichment in our culture, more Justin, as we look at everything from the customer base, the manufacturing requirements to the steel and those kinds of things. So we'll provide what we can as we go along, we'll determine what level of guidance we can provide as we make the acquisition.

Operator

We'll take our next question from Bascome Majors with Susquehanna Financial Group.

Bascome Majors - Susquehanna Financial Group, LLLP, Research Division

So we finally got U.S. safety regulations at least in draft form about the flammable liquids by rail and movements and tank car standards, and that gives you at least some incremental clarity, of which tank car upgrades are going to be required and how long you will have to make those, if you want to keep those cars and crude ethanol unit train service. How are you approaching the replaced versus retrofit decision in your own lease fleet today? And how is that going to differ between whether this is a "legacy DOT-111 car or a newer CPC-1232 car?" And if there's any differentiation between how you're approaching a jacket versus non-jacket car? Please point that out to as well.

Timothy R. Wallace

Steve, do you want to take that?

D. Stephen Menzies

Yes, sure. I don't know that I share your insight that we have great clarity following the announcements from Transport Canada, if anything I think there's perhaps even more uncertainty. The conflicts, this obvious conflicts between the 2 regulatory bodies, so I think we have much to learn. We have dedicated resources that are deep in analysis and study of this. Obviously, we have cars that will be impacted. We have cars in flammable service today and we're positioning ourselves to be able to respond to building the new specifications. We've been investing in doing our prototyping and analysis, so I feel we'll be very well prepared for whatever the outcomes are, but the announcements in the last few weeks, I didn't think brought any really great clarity to the process. As far as retrofit and scrapping, we're going to do analysis on that, so much it depends upon the age of the car, it depends upon the lease terms that we have and so there's quite a bit of analysis that needs to be done once we understand what the new performance standards are and what the specifications are that we have to make.

Bascome Majors - Susquehanna Financial Group, LLLP, Research Division

Okay. And following up on an earlier question just from a high-level, looking from here to 2015, I know you don't want to give specific guidance, but as to estimates from the Street out there, implying that earnings and EBITDA are going to be down year-over-year, which certainly is at odds with the momentum you seem to be seeing in your business and the visibility you have today. I mean is there any help or things you could point out that could cause a -- or what are you concerned about that, that might cause a weaker 2015 versus 2014, just so we can have that on our radar?

James E. Perry

So Bascome, this is James. I'm not sure I'd point anything that would give you a lot of clarity in terms of opportunities there, other than we continue to build the backlog in our business units. We continue to show strong margin performance. As we talked about before, we expect to complete roughly the first billion dollars of purchases from Element during 2014, and the second billion is slated for 2015. We will provide clarity as we have that later in the year, as is available. But we continue to have a lot of positive momentum in the company, we're optimistic about our growth opportunities, we demonstrated that through the acquisitions we've made, they continue to build the portfolio. We continue to invest our capital organically to give us growth opportunities as well.

Bascome Majors - Susquehanna Financial Group, LLLP, Research Division

All right. And if I could ask just one more on the tank cars side, clearly there's uncertainty out there, which you alluded to in the answer to my earlier question, but if you got customers with CPC-1232 cars on order today, expecting delivery over the next couple of quarters before that uncertainty maybe I guess resolved. Have they changed their response or are they changing specs in response to what we've seen already or is it more so the wait-and-see and potentially retrofit if we have to on the back end? Just what you're hearing from your customers today.

D. Stephen Menzies

Bascome, this is Steve again. We are obviously going to work with our customers trying to accommodate them. We want them to have the right cars for their fleet to the extent we are able to do that, we will. But each of those has an individual view, all other companies view this issue very differently, and I think it's our responsibility to work with them on an individual basis. It'd be very hard for me to give you a general answer to that question.

Operator

And we'll go next to Matt Brooklier with Longbow Research.

Matthew S. Brooklier - Longbow Research LLC

If you could maybe highlight what's left in terms of the $1 billion for the Element deal that should be booked in the second half of this year. And then maybe talk to the contribution per third and fourth quarter. It looks like you did about 1/3 of the total of what was left in 2Q, I'm just curious as to your expectations for kind of the cadence of what remains from Element in the back half of this year.

James E. Perry

Matt, this is James. Using the roughly $1 billion that we've talked about, and again, that could move a little bit timing-wise. To-date, Element's has purchased since December of last year through June 30, $740 million of rail cars from us, but from our Rail Group and our Leasing Group, that math will tell you there's 260 left in that first $1 billion, but again, that's not a terribly precise number. We do expect to have a relatively steady level of sales Element throughout the course of the last 2 quarters of the year. But again, geography, the timing of exact sales and whether they're from the Rail and Leasing Group is to be determined.

Matthew S. Brooklier - Longbow Research LLC

Okay. That's helpful. And then we heard there is some uncertainty with respect to flammable of tank cars and orders here. Do you have, I guess a little bit more visibility with proposed rule out there, but I'm just curious, there's -- it seems like there's still a pause with respect to the market participants stepping in and booking orders, and that was the case in 2Q, yet that the industry tank car number was really strong at roughly 10,000 units, so I'm just curious as to pause in the market, yet that the industry numbers got better in 2Q, what were some of the contributors to that improvement if you have some thoughts on that?

D. Stephen Menzies

Sure, Matt. This is Steve. I think generally, there are customers who are pausing, waiting to order new railcars, pending regulatory standards. That's to be expected. As I mentioned in my earlier comments, we also have customers who recognize that they'll have a chance to clarify their railcars specifications by the time a car is built in the late '15, '16. The regulations will be more certain before then, but beyond just tank cars going to flammables as we are seeing steady demand for other types of tank cars. In particular, we're seeing strong demand for pressure cars to move natural gas liquids and propylene, for example. We're also seeing tank cars to move more general commodities, so there are tank cars in demand beyond those serving flammable service and we will see a pause, and it'll be a temporary pause until standards are clarified to those flammable customers to place their orders, perhaps we'll see a few early, so that they can get in queue, I would expect that the demand will be strong once those flammable standards are clarified.

Matthew S. Brooklier - Longbow Research LLC

Okay. And is it fair to assume the past 2 years, we've seen a disproportionate amount of flammable, service tank car orders coming through and yet we've neglected a portion of the market outside of flammable service. Could the step up in 2Q be a result of some of these other market participants coming in and maybe playing some catch-up in some of these other tank car categories?

D. Stephen Menzies

Matt, this is Steve, yes sure. That's entirely possible. When we say disproportionate, I'm not really sure what that means if you look historically, there's always been 1 or 2 car types driving overall railcar demand, with ethanol cars back in the '07, '08 period, we got periods where coal cars drove rail car demand intermodal cars. So the trend right now is for cars for crude oil service. But we saw a lot of other tank cars over the last couple of years going to service, for hydrochloric acid, other general service cars, so these are natural cycles and trends where different car types lead the way, but the clue is demand for tank cars beyond crude oil cars.

Operator

And we'll take the next question from Eric Crawford with JPMorgan.

Eric Crawford - UBS Investment Bank, Research Division

With UBS. So just following upon -- Bascome was asking some questions on PHMSA. Appreciate the commentary on tank car rates, I hope we can drill down a little bit more on the NPRM. Do you have a preference for 1 of the 3 options or some variation that was outlined and following -- to that, any thoughts on the proposed timeframe or the retrofit estimated costs that were included, do you think those are accurate? Any color would be helpful.

D. Stephen Menzies

Eric, Steve. I think the only thing that I'm excited about is having certainty and it appears that we might have greater certainty as to the direction of regulatory requirements by the end of the year. I don't have a preference, so we're going to be prepared for any of our outcomes, and I think our team has really done a fine job in preparing themselves for regulatory change. So I'm confident we'll be in a good position.

Eric Crawford - UBS Investment Bank, Research Division

Okay. And then I guess switching over to the energy segment, the recent acquisitions and the integration that's going on there, from the segment guidance, you've taken up the margin expectations while holding revenue steady. So just wondering if that's a function of an improved margin profile for the new businesses, relative to your initial expectations or if it's just broader execution across the segment?

William A. McWhirter

Eric, this is Bill. I would say it's really broader execution across the segment. In particular, our storage containers doing very, very well. And our wind tower business continues to have improved performance, so probably those 2 businesses is really the driving force. I am pleased with the integration of the businesses, but like all new business we bring in, it takes a little time to get them up to full speed.

Eric Crawford - UBS Investment Bank, Research Division

Sure. Okay, that's helpful. And then last for me. You mentioned a margin headwind in rail just from the startup costs and a little bit from mix, but wondering if you could kind of give us a sense of the breakdown between those 2. Is it 50/50, equally attributable or is 1 really the primary driver?

James E. Perry

Eric, this is James. We're really not in a position to break that down. The margins remain very strong in the second half of the year for rail certainly. We think we wanted to point out that you all going from time to time, as we're ramping up our capacity to the new volume guidance that Steve provided. We're ramping up our maintenance facilities, integrating the Arkansas facility, for example, as well as that Steve mentioned, the timing of which we took certain orders and when we're producing certain orders, you can have a slight headwind in the second part of the year, but again, margins remain very strong in the Rail Group.

Operator

And we'll go next to Salvatore Vitale with Stern Agee.

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

Just a quick question on the backlog, if I just back out the implied second half deliveries guidance, just based on your full year guidance, I see 29,500 to about 31,000 cars, I guess slated for delivery beyond 2014. How should we think about how much of that stretches out into 2016 at this point?

Timothy R. Wallace

Steve?

D. Stephen Menzies

I don't want to give any specifics of what parts of our backlog fall into what years, but I think we have great visibility into 2015 in our production plans, we do have some of our production lines that are slated all the way into 2016. So obviously, that gives us a good bit of visibility and allows us to plan our business effectively, and I would expect that we'll continue to take orders and fill in whatever holes we might have in '15 and '16 as we move forward.

Timothy R. Wallace

Sal, this is Tim. The other thing that Steve and his group have done really well is they've identified bottlenecks that they may have on certain product lines. And then the capital that James mentioned, the internal capital that we're spending, we've spent quite a bit of capital on minimizing bottlenecks, freeing up bottlenecks in our rail car lines and then getting the volume to increase and that capital that we're spending is getting tremendous returns on it, and the people are doing a fabulous job of driving operating efficiencies once the bottlenecks that we have in a particular production facility get the -- once they overcome them. So this -- that's why it was a little bit hard for Steve to say how high he could go because our industrial engineering people as well as our lean initiatives and all of our people are identifying bottlenecks once they overcome one bottleneck, then they go to the next one, and we've made great headway in continuing to invest capital in that area.

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

Okay, that's helpful. I appreciate your response. Regarding the Georgia facility, could you give us a little color there? When does the incremental capacity from that, come online or is it already on stream? And have you spoken in the past about what -- how many cars -- how much that capacity actually is?

D. Stephen Menzies

Sal, this is Steve. Again, I'm very pleased with the progress we're making. We're fully positioning our Cartersville facility to be a very flexible facility, capable of making multi-products so within our railcar product line. I would anticipate that we'll be in a reasonable level of production by the end of the year, and then we will ramp up that facility to meet demand requirements as we see fit. And again, we typically don't provide capacity numbers by plant or in total, but this facility will be very constructive to our production plants.

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

Okay, that's helpful. And then if I could just switch gears to the maintenance services side. Once all of your -- you mentioned a few different plants, I think you said 4 additional facilities beyond the Arkansas facility. So once all those facilities are up and running, what do you think your capacity to do the retrofits would be at that point?

D. Stephen Menzies

Sal, Steve again. It's a difficult question because I'm not sure what the retrofits are going to be and there's a fair amount of variability in the different possible outcomes, but we certainly want to be able to comply with any of the regulatory requirements from a timing standpoint, as well as from a specification standpoint. And as I mentioned, we have our own fleet that we want to be sure that we can keep in service and meet the needs of our customers and obviously, we want to be able to work with key customers who have larger fleets as well. So I think we'll be in very good position in response of regulatory rate changes when they come down.

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

And then just a follow-up on that. Do you expect that to be a profit center at some point or do you expect the capacity to be consumed I guess by the retrofits on your lease fleet?

D. Stephen Menzies

Well, obviously, Sal, if we're doing a lot of work at our own fleet, those revenues and profits are eliminated in consolidation. Profits that we would realize from third-party work would go to the bottom line and difficult for us to really give you any projections on that right now.

Operator

The next question is from Arthur Hatfield with Raymond James.

Derek Rabe

This is Derek Rabe on for Art. Just had 2 questions that really haven't been addressed on my end. The first question concerns labor. We've been hearing across multiple industries that there's some difficulty in finding and keeping skilled workers. As you ramp up your production and maintenance capabilities across several of your platforms, has this been an issue or are you seeing this as being an issue going forward across any of those businesses be it in the U.S. or Mexico?

Timothy R. Wallace

Derek, this is Tim. In hiring skilled laborers throughout our system has been a challenge and our people working with our HR groups are trying to find a variety of different ways to assist our plants in hiring people in a number of areas we have, training programs that have been established and we work with the local authorities to -- and the trade schools to try to equip people for our type of work environment and -- but this is nothing new. This is something, I mean, my 16th year of CEO, and almost every year that I've been in this position, we've had challenges of hiring people and getting them equipped for our facilities and our people do a remarkable job of coping with the challenges that are out there.

Derek Rabe

Okay, I appreciate that color. The second and final question from me, could you just provide an update on where you stand today in terms of your DOT-111 and flammable service exposure within your lease fleet? I think at the end of the last quarter, it was down to 11,300. And then secondly, as you reduce that exposure within your own fleet, can you comment on what you're doing with those cars? Are you moving those to other services or are you looking to sell?

James E. Perry

Derek, this is James. In terms of the level of exposure we have with those cars, it's in line with where it was last quarter. We gave guidance last quarter, that was around 11,000 and that number hasn't really changed. We've added cars to the fleet. We sold cars to our partially owned fleet as well as to Element and other third parties. So that number can move around. I don't think we're in a position yet to talk about what we may do to change the exposure or what may happen with those cars until as Steve said. We'll have more clarity around the regulations.

Operator

And we'll take our last question from Tom Albrecht with BB&T Capital Markets.

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

Most of my questions have been answered, but 2 questions. As the recovery takes place in non-tank cars, I was wondering, Steve, if you could comment on how competitive pricing might be for those? And then just wanted to clarify, I know years ago, you did intermodal cars, but it seems like there's been a long time, as of right now you're not building intermodal or coal cars. Is that correct?

D. Stephen Menzies

Tom, Steve here. Our industry is a very competitive industry. And I think historically, we've seen excess capacity compared to demand. We have very, very strong demand. I think some of the capacity in our industry has been rationalized. I think some of the capacity for freight cars has been moved to tank cars. And so when we look at a 6 quarter backlog, I think it's a very strong environment and it certainly sends messages that we should be able to operate in a fairly strong pricing environment as well. So I like the fundamentals that I'm seeing in the non-tank car side of the business and hopefully, those will continue. With respect to intermodal cars, there was a large number of intermodal cars placed during the second quarter orders for intermodal cars. And you are correct, we are not currently building intermodal cars. And frankly, when we prioritize our production plans, we look for those cars that provide us the greatest returns and typically we find that those are markets that have multiple customers and fewer than 5 or 6 suppliers and when we look at the intermodal market, we see basically 1 buyer and multiple suppliers. So that doesn't really compel us to chase that market when we have opportunities that are consistent with our current production plans.

Gail M. Peck

Okay. This is Gail Peck. It looks like that concludes today's conference call. A replay of this call will be available after 1:00 Eastern standard time today through midnight on August 6, 2014. The access number is (402) 220-0119. 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

This concludes today's program. Thank you for your participation. You may disconnect at anytime.

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Trinity (NYSE:TRN): Q2 EPS of $1.01 beats by $0.25. Revenue of $1.48B (+38.3% Y/Y) beats by $130M.