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

| About: Trinity Industries (TRN)

Trinity Industries, Inc. (NYSE:TRN)

Q4 2012 Earnings Call

February 16, 2012 11:00 a.m. ET

Executives

Gail Peck – Treasurer

Tim Wallace – Chairman, CEO and President

Steve Menzies – SVP and Group President of the Rail and Railcar Leasing Groups

Antonio Carrillo – SVP and Group President of the Energy Equipment Group

Bill McWhirter – SVP and Group President of the Construction Products and Inland Barge Group

James Perry – SVP and CFO

Analysts

Alex Walsh – KeyBanc Capital

Bascome Majors – Susquehanna

Allison Poliniak – Wells Fargo

Paul Bodnar – Longbow Research

Sal Vitale – Sterne Agee

Zahid Siddique – Gabelli & Company

Operator

Good day everyone and welcome to the fourth quarter results conference call. (Operator's instructions) As a reminder, today's call may be recorded, but 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. The 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 forward-looking statements.

I would now like to turn the call over to Ms. Gail Peck. Please go ahead, ma'am.

Gail Peck

Thank you Josh. Good morning, everyone. Welcome to the Trinity Industries fourth quarter 2011 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 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: Steve Menzies, Senior Vice President and Group President of the Rail and Railcar Leasing Groups; Antonio Carrillo, Senior

Vice President and Group President of the Energy Equipment Group; and Bill McWhirter, Senior Vice-President and Group President of the Construction Product and Inland Barge Group. Following their comments, James Perry, our Senior Vice President and Chief Financial Officer will provide the financial summary and guidance. We will then move to the Q&A session. Mary Henderson, our Vice President and Chief Accounting Officer, is also in the room with us today.

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

Tim Wallace

Thank you, Gail, and good morning, everyone. I'm please with the improvements in our financial performance during the fourth quarter. All of our business segments, with the exception of one, produced solid results. 2011 was a significant growth year for Trinity; our businesses clearly demonstrated their ability to generate growth in specialized areas where demand was strong.

I'm very pleased with the way they worked together to leverage our existing manufacturing capacity to take advantage of growth opportunities. During 2011, Trinity's annual revenues grew approximately 42%. If you extract the earnings associated with the flood insurance claims settled during the year, our normalized EPS growth was approximately 94% for the year.

As we begin 2012, I'm very pleased with the positive momentum that is occurring within our company. The operating environment is in place for our businesses to generate operating leverage during 2012. Predicting operating leverage with precision is difficult because there are many factors to consider.

Demand for rail cars in North America remains consistent during the fourth quarter. Orders in our Rail Group exceeded deliveries, resulting in backlog growth for the eighth consecutive quarter. Our rail car manufacturing business's ability to achieve operating leverage during the fourth quarter was an accomplishment due to the steep ramp-up these businesses experienced during the quarter. Their current production footprint provides a nice platform for further improvements.

Our Rail Car Leasing business has great momentum. Their commercial team continues to originate rail car leases with attractive least terms that tie nicely with existing production plants. Our Leasing commercial team is also obtaining better terms for renewals on existing Leasing equipment. Strong rail car demand has created an environment that is ideal for selling rail cars from a lease lead into the secondary market.

Our Inland Barge Group is also experiencing consistent demand. During the fourth quarter, our barge business settled insurance claims associated with the severe flooding last May at our barge facility in Missouri. I'm very pleased with the speed with which this group recovered from the flood and resolved the associated financial issues.

Our Construction Products businesses are performing well in a challenging market environment. During the past few years, they completed several transactions that contributed to the improvement in their fourth quarter financial results. This group will continue to pursue additional ways to improve their financial performance, despite sluggish U.S. demand.

Our Energy Equipment Group reported a small loss during the fourth quarter. The loss was primarily due to lingering issues associated with production line transmissions and contract disputes in the wind tower business. This business recently filed a lawsuit over contract disputes with a major customer. The nature of the litigation prevents us from making assumptions on the final outcome.

I see a number of positive signs emerging from our wind tower manufacturing operations. We have a highly seasoned team focused on resolving the current challenges. It's always difficult to predict exactly when a business will completely overcome a complex challenge like the one our wind tower business currently faces. I anticipate this business will be able to generate improvements during the next few quarters.

From an overall company point of view, I'm pleased with our accomplishments during the fourth quarter and 2011 as a whole. I'm optimistic about our outlook for 2012. Our backlog of orders in our major businesses provides opportunities for our businesses to generate operating leverage that builds additional positive momentum. Trinity is fortunate to have a highly seasoned group of employees who know how to operate in a variety of conditions. Our overall performance and the strength of our market leadership positions reflect the talents and hard work of our employees and our commitment to operational excellence.

I will now turn it over to Steve Menzies for his comments.

Steve Menzies

Thank you, Tim. Good morning. We are pleased with the 2011 operating results of the Rail and Leasing Groups, and the operating momentum building in both business groups at year-end. During 2011, our Rail Group increased production and operating profit in each quarter in route to producing over 14,000 rail cars. During the fourth quarter, our Rail Group posted an operating profit of $34.4 million, a 90% increase over the third quarter. Rail car shipments during the fourth quarter increased more than 41% when compared to the third quarter. Our rail car order backlog increased for the eighth consecutive quarter and is at its highest level since the fourth quarter of 2007.

During 2011, our Leasing Group experienced consistently strong fleet utilization and strengthening lease rates. During the fourth quarter 2011, the Leasing Group posted a 34% increase in operating profit compared to the fourth quarter of 2010, due principally to higher lease renewal rates and profit from lease portfolio sales. Lease rate and renewal trends continue to remain favorable during the fourth quarter.

Industry demand for new rail cars during 2011 outpaced general economic growth and was driven primarily by orders for rail cars needed to transport crude oil from shale and tar sands fields, small covered hoppers for sand use and shale (inaudible) operations and large covered hoppers for minerals and agricultural products.

In the long run, we believe the demand for rail transportation to support crude oil transport and gas fracking will continue to generate additional new rail car orders. Near-term, the current price and abundant supply levels of natural gas may negatively impact drilling plus reducing demand for (inaudible) sand and therefore, small covered hoppers. This cycle is very characteristic of many new markets we serve. At current oil price levels, we expect oil drilling and the demand for rail cars to transport crude oil will remain steady. The energy sector is an exciting new growth opportunity for rail, and we are monitoring developments in these markets closely.

The abundance of low-price natural gas is benefiting North American chemical producers. Several major chemical companies have announced plans to build new plants or to significantly expand existing facilities in North America. This indicates that domestic chemical production will likely increase, driving demand for new rail cars to transport chemical products. Order for auto racks and flat cars for auto racks were also placed during the quarter, as automobile production is projected to rise, and the existing auto rack fleet is fully deployed.

Inter-modal orders accounted for approximately one-fourth of industry orders during the fourth quarters, reflecting strength in consumer shipments and a continued shift in rail equipment preferences. Demand for coal-carrying rail cars is weak while utilities take advantage of low-price natural gas for power generation.

During the fourth quarter, Trinity Rail received orders for approximately 6,220 new rail cars, including auto racks. Our fourth quarter orders were primarily for auto racks and tank, flat and covered hopper rail cars. Orders came from industrial shippers, railroads and third-party leasing companies, and Trinity Rail's rail car order backlog was 29,000 rail cars at the end of the fourth quarter, up 4% from the end of the third quarter. Approximately 24% of the units in our order backlog are for customers of our leasing business.

We were successful in securing orders during the fourth quarters that extend current production lines well into 2012, and for some railcar types, into 2013. We continue to focus on orders that optimize production at our facilities currently in operation, minimize line changeovers and reflect favorable pricing levels.

Our fourth quarter orders should position us to achieve increased operating leverage. We delivered approximately 5,105 railcars during the fourth quarter. This is an increase of approximately 41% from the third quarter, and compares most favorably with the approximately 2,230 railcars we delivered in the fourth quarter of 2012.

The steep slope of our production ramp-up during the last four quarters has been challenging. We are now positioned to improve our operating leverage as our labor force is more experienced and we stabilize our railcar production rate during the next few quarters.

For the year 2012, we are projecting delivery of approximately 18,000 to 20,000 new railcars. As a point of comparison, we delivered 14,065 in 2011 and 4,750 in 2010. We remain flexible in our 2012 production plan and are prepared to respond to further shifts in demand. We will continue to update you on our full-year delivery projections as the year unfolds.

We added approximately 800 new railcars to our lease portfolio during the fourth quarter, bringing our wholly owned lease fleet to 54,595 railcars, a 5.2% increase compared to the fourth quarter of 2010. Our lease fleet utilization at the end of the fourth quarter of 2011 was 99.3% and our average remaining lease term remained at 3.5 years.

The TRIP lease fleet totals 14,350 railcars operating at 99.9% utilization. As a reminder, Trinity owns 57% in TRIP and manages the portfolio.

Lease renewal trends are favorable. A high percentage of our lessees are renewing their contracts, which lowers remarketing expenses and minimizes out-of-service time. Renewal lease rates are also showing steady increases. Lease rates on new cars are at attractive investment levels. We expect this trend to continue while existing railcars are in tight supply and new railcar production backlogs remain extended.

We have grown our lease fleet through the strong lease origination capabilities of our commercial team. We have also demonstrated our competence to effectively remarket our lease portfolio, as evidenced by our utilization and renewal trends.

With the scale diversification of our leasing footprint, we are now better positioned to more actively participate in this secondary market.

We have seen an active secondary market for the purchase and sale of leased railcars during the last few quarters. Increased availability of capital for buyers is supporting the financing of these portfolio purchases. We have, over time, been successful at selling lease railcars from our portfolio. In the third quarter of 2011, we sold a group of lease railcars from our portfolio and we sold an additional group in the fourth quarter. We expect to continue lease portfolio sales during the next few quarters, assuming market conditions continue to support an active and deep market of buyers.

In summary, railcar market conditions remain favorable, although driven in a large part by demand related to energy exploration and production. We are closely monitoring developments in the oil and gas markets to understand factors that may influence future demand for rail cars.

During the fourth quarter, we reached the latter stages of production ramp up. As we enter 2012, we expect our operations team to focus on improving efficiencies, while producing at a stable rate for the next few quarters.

We expect to continue to see the benefits of the strong lease pricing developments and an active secondary market. I will now turn it over to Antonio.

Antonio Carrillo

Thank you Steve and good morning. Since our last conference call, progress has been made towards resolving a number of challenges facing our wind tower business. We will provide only a small level of color about this business today, due to pending litigation and contractual disputes that are still in the process of being resolved.

You will recall that to accommodate a customer, we transitioned last May from manufacturing 80-meter towers to manufacturing 100-meter towers. Since then, we have encountered a number of issues related to this transition. During the fourth quarter, we made progress working through a number of these issues. One of our priorities has been to enhance our manufacturing flexibility so we can respond efficiently to customer needs.

We have made significant progress in this area, and are currently in the process of transitioning back to 80-meter poles at some of our facilities under the terms of our original contract. In respect to contractual issues, we expect customers that have placed orders with us to fulfill their commitments. To the extent our customers require contractual modifications and we can identify terms that are mutually acceptable to both parties, we will work towards a resolution.

We are currently in the middle of discussions with customers about contract modifications. These discussions are moving slowly due to the complexity of the issues involved. You may be aware that Trinity Structural Towers has joined a group of other U.S. wind tower manufacturers in a trade case against wind tower imports from China and Vietnam. For the past few years, U.S. wind tower manufacturers have seen what we believe are unfair pricing practices on the part of wind tower manufacturers in these countries. Last week, the International Trade Commission unanimously decided that there is enough evidence to support an investigation. We're closely monitoring developments in this case.

With respect to the other business lines within the energy equipment group, I am pleased with the solid revenue increases we experienced throughout the year. Our businesses clearly demonstrated their ability to react, to specialized demand to take advantage of growth opportunities. I will now turn it over to Bill for his comments.

Bill McWhirter

Thank you Antonio, and good morning, everyone. Our Construction Products Group continued to perform well during the fourth quarter, producing an operating profit of $11.2 million for the quarter compared to $6.7 million in the same quarter a year ago. This significant improvement in results was primarily due to two factors: relatively mild winter weather that has continued into 2012, and to a larger extent, the success of our efforts in 2011 to reposition this segment.

During 2011, we reduced our exposure to Ready Mix concrete while growing our highway products, construction aggregates and galvanizing business lines. All of these business lines provide us the potential for higher margins with reduced market volatility compared with the Ready Mix concrete business.

Looking forward into 2012, I see more opportunities to grow our higher margin businesses through acquisitions and continue our efforts to improve our overall returns within the Construction Products Group.

Moving to our Inland Barge Group. For the fourth quarter, our barge business had sales of $150 million and reported operating profits of $39.6 million. $17 million of these operating profits were a one-time gain related to the flood that occurred at our facility in May of 2011. The net result is a normalized profit of $22.6 million for the fourth quarter which compares with $18 million in the same quarter of 2010.

Barge movement of petroleum products, chemicals, and coal continues to be strong. During the quarter, we signed $80 million in new orders. Our barge backlog now stands at $495 million at the quarter's end.

Market activity for new barges for 2012 and 2013 continues to be encouraging. Overall, I am very pleased with the 2011 performance of both our barge and construction products groups. Our team of employees had an excellent year.

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

James Perry

My comments relate primarily to the fourth quarter of 2011. We will file our form 10K later today.

For the fourth quarter of 2011, Trinity reported earnings of $0.70 per common diluted share. This compares to $0.22 per common diluted share in the fourth quarter of 2010.

Revenues for the fourth quarter of 2011 increased 48% to $942 million compared to $636 million of revenues in the same quarter last year. This is resulting from a higher level of railcar and tank barge deliveries, continued growth in our railcar leasing operations, and an increased level of railcar sales from the leasing portfolio.

Trinity's operating profit increased 72% during the fourth quarter to $139 million and our EBITDA increased to $188 million from $122 million in the same quarter of 2010. The reconciliation of EBITDA was provided in our press release yesterday.

The results for the fourth quarter of 2011 include a pre-tax gain of $17 million or $0.14 per common diluted share related to the final settlement for the disposition of insured property, plant, and equipment damaged by a flood at Trinity's Missouri barge facility last May.

The insurance claim related to the flood is now closed. As we mentioned on our last conference call, our earnings guidance for the fourth quarter did not include this gain. Our fourth quarter 2010 results included a pre-tax charge of $6 million or $0.04 per common diluted share related to the redemption of the company's senior notes.

For the total year 2011, our revenues increased 43% to $3.1 billion compared to $2.2 billion in 2010. Our earnings per common diluted share in 2011 were $1.77 compared to $0.85 in 2010.

Our operating profit was $425 million in 2011, compared to $304 million in 2010, and our EBITDA totaled $616 million, compared to $488 million in 2010. Full-year 2011 results included a cumulative pre-tax gain of $15.5 million, or $0.12 per common diluted share, related to the floods. On a full-year basis, one-time items reported in 2010 were not meaningful to results.

The Rail Group recorded revenues of $453 million in the fourth quarter, a 121% increase over the same quarter 2010, on the strength of 5,105 rail car deliveries compared 2,230 deliveries a year ago. The increase in deliveries reflects strong growth in demand during the last year and Trinity Rail's successful ramp-up of production capacity to meet that demand.

The Rail Group's operating profit for the quarter increased to $34 million compared to $9 million a year ago due to higher volume and operating leverage. For the total year 2011, our Rail Group delivered 14,065 rail cars and generated $1.3 billion of revenue compared to deliveries of 4,750 rail cars and revenues of $522 million in 2010.

During the fourth quarter, the Leasing Group recorded revenues of $157 million and an operating profit of $76 million, including $18 million of gains from rail car sales from the leasing portfolio. This compares to revenues of $119 million and an operating profit of $57 million during the fourth quarter last year, including $2 million of gains from rail car sales.

We mentioned on our last earnings conference call that selling rail cars from the leasing portfolio is a common industry practice that is driven by market demand. Our lease fleet has grown to a size that enables us to pursue these opportunities when they align with our strategic goals for the portfolio, particularly maximizing returns, diversifying the lease fleet, and managing our investment levels.

As we mentioned in our earnings release yesterday and detail on our 10-K that will be filed today, during the fourth quarter, we adopted an emerging industry practice for recognizing revenue from the sale of the rail cars from the lease fleet. For rail cars owned by the leasing business for one year or less at the time of sale, sales are recognized on a gross basis as part of the leasing revenues and cost of revenues.

For the fourth quarter 2011, revenues included $29 million of sales of this type. For rail cars owned by the leasing business for more than one year at the time of sale, sales are recognized as net gains or losses from the disposal of long-term assets. Proceeds of car sales at this type totaled $43 million in the fourth quarter 2011, and are reported on our statement of cash flows in our 10-K. Prior-year balances have been reclassified to conform with this policy, the details of which will be made available in our 10-K. The adoption of this policy does not change operating profit in the current period or prior periods.

Our Inland Barge Group had another good quarter, as they fully recover from the flood of our Missouri facility. Reported revenues of $150 million for the fourth quarter compared to $127 million in the same quarter last year. The Group's operating profit, excluding one-time flood-related items in both periods, was $23 million, compared to $18 million in the same quarter last year.

The Energy Group incurred an operating loss of $900,000 in the fourth quarter on revenues of $125 million. This compares to an operating profit of $5 million on revenues of $108 million last year. Revenues for the fourth quarter of this year increased compared to the same period last year as a result of higher shipments of tank containers and tank heads, partially offset by lower volumes of wind towers. The loss result is from transition issues arising from changes in product mix in our wind towers business as well as competitive pricing on wind towers.

Last month, we filed litigation against a customer in our wind towers business for breach of contract resulting from their failure to comply with their multi-year obligations. We are unable to provide further comment at this time on that topic due to the ongoing litigation.

The Construction Products Group recorded fourth quarter revenues of $142 million and an operating profit of $11 million. This compares to revenues of $129 million and an operating profit of $7 million in the fourth quarter of 2010.

This Group has continued to perform well in a challenging construction environment. The Group has made significant progress realigning its portfolio through a series of strategic acquisitions in the highway products space and asset repositioning within the concrete and aggregates business to align with demand.

In summary, this year's fourth quarter results from our core operations, which exclude the gain from the flood settlement, area substantial improvement over the same period last year. At year-end, our balance of unrestricted cash totaled $351 million. When combined with available capacity under our corporate revolver and Trinity leasing warehouse facility, we had more than $850 million of available liquidity at the end of the year, which positions us to capitalize on business opportunities as they arise.

I will now discuss our forward-looking guidance. For the first quarter of 2012, we expect earnings per common diluted share for the company to be between $0.43 and $0.48. For the full year, we expect earnings per common diluted share of between $2.35 and $2.55.

We anticipate that the Rail Group will report revenues of between $460 million and $480 million during the first quarter, with an operating margin of between 7% and 9%. We expect our rail car manufacturing companies to deliver rail cars to our leasing company that will result in (inaudible) of approximately $120 million to $140 million in consolidated revenues and between $0.09 and $0.10 of earnings per share in the first quarter. For the full year, we expect our net leasing capital expenditures to be between $300 million and $350 million.

Included in our guidance for the first quarter is approximately $0.03 to $0.04 per share of gains from the sale of rail cars from our lease fleet. Our annual guidance includes approximately $0.10 to $0.12 per share from car sale gains. Again, the level of rail car sale activity from the lease portfolio is difficult to accurately project given the opportunistic nature of the transactions and uncertainty about precise timing.

The change in accounting policies does not impact the level profit we have assumed in this guidance. Inland Barge revenues are expected to be between $160 million and $170 million in the first quarter, with an operating margin of 13% to 15%.

As Antonio mentioned, our Energy Equipment Group continues to conduct discussions with wind tower customers about mutually acceptable contract modifications. Our wind tower business is also focused on enhancing its ability to transition effectively between wind tower models when customers' product needs change. We are making progress in these areas. We expect to see improvement in the Energy Equipment results within the next few quarters. However, we remain unable to provide detailed financial guidance until we have more clarity about the exact timing of these business developments.

We will continue to evaluate market condition as we deploy capital to promote the growth of our businesses. Our current plan calls for an investment of $100 million to $125 million of capital expenditures in our manufacturing businesses during 2012.

Our results for the first quarter and full-year of 2012 will depend on a number of factors, including: the level of operating leverage we achieve as our rail businesses operate at a relatively steady level of production; the impact of product mix changes in the wind towers business; additional prospective sales of railcars from the leasing portfolio; the amount of profit elimination due to railcar additions to our Leasing Group; the impact of weather conditions on our Construction Product businesses; and the outcome of pending litigation in our wind towers business.

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

Question-and-Answer Session

Operator

(Operator instructions) We will pause for a moment for any questions to populate the queue.

Our first question comes from Steve Barger with Keybanc Capital. Please go ahead; your line is open.

Allison Poliniak – Wells Fargo

Good morning. This is actually Alex Walsh sitting in for Steve. Thanks for taking my questions. First off, pretty solid order activity in the quarter. I was wondering if you could just talk to or characterize what you are seeing in terms of order rates and inquiry levels thus far in this year.

Tim Wallace

Alex, are you talking... Which business? All of our businesses?

Allison Poliniak – Wells Fargo

For the Rail Group.

Tim Wallace

Oh, for the Rail Group? Steve, why don't you take that.

Steve Menzies

Sure, Alex. We've seen fairly consistent demand here in the first quarter compared to the fourth quarter. Again, as I mentioned in my comments, with gas prices weakening, we are seeing some slowing down in near-term gas drilling, but we would expect that that would pick up somewhere down the road. But generally, consistent demand here in the first quarter, that we saw in the fourth quarter.

Allison Poliniak – Wells Fargo

Okay. And it looks like implied price per car in the backlog took a nice step up. I know that can be impacted by mix. I was wondering if you could just talk directionally about pricing for both new cars and lease rates, and how that kind of compares to this same time last year.

Tim Wallace

Okay. Steve, do you want to take it?

Steve Menzies

Sure. It's always difficult to generalize about pricing, as you mentioned, because of mix and other issues. But clearly, we're seeing strong demand, with the existing fleet very much in equilibrium and fully utilized and extended production backlogs. That really contributes to very strong pricing environment, as evidenced in our renewal trends, and we're clearly seeing increased prices in our new rail cars as well.

Allison Poliniak – Wells Fargo

OK. I guess as I think about pricing and what sounds like production possibly leveling off, given the targets that you've talked about, as you got the infrastructure in place to really expand margins, how you guys thinking about incrementals relative to prior cycles? It looks like on implied, it's maybe a low double-digit incremental, and I think you've done a north of that in the past.

James Perry

Sure, Alex. This is James, and as we indicated, we are at relatively steady level of production going into this year. We indicated margins of 7% to 9% in the first quarter, and every cycles going to be little bit different. You are still looking at a level of cars this year that is well south of the peak in the prior years. We produced 28,000 cars or so; the industry was producing north 70,000 cars. So while demand is strong right now, it's hard to speculate too far out beyond the next couple of quarters on what margins may do given the embedded pricing and leverage we're able to achieve.

Allison Poliniak – Wells Fargo

OK. That's helpful. And one more before I jump back in line: you talked about the implications of oil and gas demand on the Rail Group, but I was wondering if you could kind of talk through the implications for Barge and what your longer-term expectations were there, and I guess maybe just kind of comment on order rates for the quarter as well.

Tim Wallace

Bill?

Bill McWhirter

Yeah. I guess I will start with the order rate in the quarter. I think, consistent with Steve's comments, we're seeing a nice demand in the business. Business does tend to be a little seasonal in orders, with third quarter typically being a little higher than fourth quarter, but I am encouraged by the overall market activity.

Again, much to Steve's' comments, I think the tank barge business in particular has benefitted from the move of petrochemicals and chemical products, and we've seen what I would call a fairly robust demand throughout our product line on the tank barge side.

Allison Poliniak – Wells Fargo

Okay. I'll jump back in line. Thanks.

Operator

Next question from the site of Bascome Majors with Susquehanna. Please go ahead; your line is open.

Bascome Majors – Susquehanna

Good morning.

Tim Wallace

Good morning.

Bascome Majors – Susquehanna

Looking at the order, delivery and the backlog trends in your Rail business, pretty much across the board, you gained share this quarter and outpaced the industry. I was curious if you could talk a little bit to why you think you're gaining share at this point of cycle -- is that strategy? Is that mix? Is it a little bit of both? -- And sort of how you feel about your position there and where it might move in the next few quarters here.

Tim Wallace

Steve?

Steve Menzies

For sure. Bascome, as we talked many times on this conference call, we don't really drive our business by market share. Market share is a number we measure kind of as an output, and we're really focused on orders that support our production plan and support the product lines that we find to be most profitable for us. And generally, we see demand consistent with our production plans, and we were able to continue to fill our production lines with orders that we're currently making. So there are some areas in the marketplace that we have less interest, where we see pricing levels less attractive and where competition is much more heated, and we saw orders for cars in the fourth quarter for some of those. So it really depends upon mix and now we look at the business going forward and what cars we're producing, but market share really isn't something that drives our day-to-day decisions.

Bascome Majors – Susquehanna

Could you be a little bit more specific about those where you're deliberately not playing now, just out of curiosity?

Steve Menzies

Well, as I mentioned in my script, about 25% of the orders during the fourth quarter for inter-modal cars, that's not a market that we're currently heavily focused on.

Bascome Majors – Susquehanna

Okay. Well, thank you. And could you talk a little bit, with your order uptick, could you talk a bit about the customer mix and maybe how that's changed in the last few months and subsequent to quarter-end?

Steve Menzies

Yeah, Bascome, Steve again. In answering that question, really look at 2011, and I think one of the largest developments from a customer mix standpoint was the return of third-party lessors. Third-party lessors have been active in the marketplace, ordering new cars, and I see that as a big change in 2011 versus 2010, and I would expect third-party lessors will stay active in the business in 2012, given the supply / demand levels and the attractive nature of investment opportunities.

Railroads are buying cars, industrial shippers are both buying cars and leasing cars, so we really see a broad customer base responding in the current market.

Bascome Majors – Susquehanna

Okay. And I'll just take one more and hop off. Can you talk a little bit about TRIP and sort of its profit contribution and if you could see that becoming more material in the future.

James Perry

Sure. This is James, Bascome. TRIP is at a relatively steady level right now, as you know. TRIP has the opportunity to do the same thing as our Leasing business is doing with (inaudible) renewal rates and those type things. You will see in the 10-K some car sales from TRIP from time to time. But, you know, TRIP is working through its operating efficiency as we look at lease rates and expenses and those type things as our overall Leasing business is. We did recapitalize TRIP last year, so you see a different level of interest expense that's detailed in the 10-K as well. But in terms of it becoming more material, right now, as TRIP is positioned, it's a relatively steady size, and so its size in relation of materiality to the overall Leasing company, we don't see changing much in the near-term.

Bascome Majors – Susquehanna

All right, guys. Thanks for the time.

Operator

Our next question comes from the site of Allison Poliniak with Wells Fargo. Please go ahead; your line is open.

Allison Poliniak – Wells Fargo

Hi. Good morning, guys. Bill, just going back to the barge, if I remember correctly, I think the dry barges have been the primary production that you guys have been doing, but it sounds like, obviously, a lot more interest on the tank barges. Could we expect maybe a more favorable mix as we move toward the back half of 2012 as a result, in that segment?

Bill McWhirter

I think, Allison, that the mix is going to be relatively consistent. Our plants now are at a very, very high production rate. I never call it 100%, but we are running at a pretty hot pace in all of our facilities. So I think the mix you fill find will be more in whether the tank barges will be in 30Ks, 10Ks, hot oil or clean oil barges. And so that can drive the margin a little bit, but overall, it's probably pretty steady as we go forward.

Allison Poliniak – Wells Fargo

Okay. Thank you.

Operator

Your next question comes from the site of Paul Bodnar, with Longbow Research. Please go ahead; your line is open.

Paul Bodnar – Longbow Research

Hey, a couple of questions. First, it's just on the guidance. It seemed like in the quarter, your 18,000 to 20,000 deliveries for 2012, obviously, you've kind of exceeded that pace in the fourth quarter. I was just wondering if you're kind of being conservative for the back half of 2012, or if you could just give a little more detail on that.

Tim Wallace

Steve, you want to take that?

Steve Menzies

Just to be clear, I think what I said was we're projecting deliveries at this time in 2012 of 18,000 to 20,000 cars, and our production level in the fourth quarter was slightly above 51,00 cars. So, I think what we're looking at right now, Paul, is that for the next few quarters, we would expect a stable manufacturing environment from a production level standpoint. We'll see where the market goes from there, and react and adjust accordingly for the second half of the year.

We remain flexible. We've got the ability to scale up if we see demand continuing to increase. We're comfortable with producing at our current levels, and if the economy goes a different way, we're prepared to take actions there too.

Paul Bodnar – Longbow Research

You know, I guess along those lines, tank car demand for these oil shale plays seems to be pretty strong, and from what I understand, you guys are pretty much sold out for 2012 on the tank car side. What would it take to open up some initial production?

Steve Menzies

Well, I think we stated over the last couple quarters, too, that before we open up additional capacity, we want to be confident that there is sustainable demand, and sustainable demand is more than demand for a couple of quarters. So, when we see that type of sustainable demand, our plants are very flexible. Obviously, we have idle facilities, but we also have facilities making other product lines that, if we see keen opportunities, we're able to shift those product lines at those plants and move into producing rail cars.

In fact, if you look back a few years ago, we were building rail cars at a number of plants. Our rail car business began to slow, wind towers was taking off and we were able to convert those plants to wind towers, and similarly, we went back the other way. So our flexibility is really our key in responding to market shifts, and we really do keep our ear to the ground in the market to anticipate those shifts and be ready to move if we see sustainable demand.

Paul Bodnar – Longbow Research

Do you think you'd actually convert one of wind facilities back to tank car production, or would you probably go with a new one?

Steve Menzies

It really depends upon the circumstances at that time, Paul. But we certainly have that flexibility, and we evaluate it continually, on a regular basis.

Paul Bodnar – Longbow Research

And then, I just want to make sure I heard something right on the Barge side. Did you say 13% to 15% operating margin was the guidance for the quarter?

Bill McWhirter

Yes, Paul, that is correct.

Paul Bodnar – Longbow Research

Give just a little more detail on that, too, just sequentially. I mean, even if you kind of make the adjustments for last year, that will be kind of be below any quarter, I think.

Tim Wallace

Bill?

Bill McWhirter

No, Paul I think if you make the adjustments for last quarter, we would have been sitting in Q4 2010 at somewhere around 14.5%. Normalized on this quarter, we come off about 15.1%, 15.2% so, very much in line with that kind of mid-teens margin perspective.

Paul Bodnar – Longbow Research

Okay, and I guess, one last question is on the oil shale and the tank car side. I mean, are those customers leasing or are they buying, or what kind of mix are you seeing on that?

Steve Menzies

This is Steve again, Paul. We've actually seen both. We've seen some exploration companies, we've seen some producers, we've seen oil brokers both buy cars and lease cars.

Paul Bodnar – Longbow Research

What kind of terms are you on leasing? Are you going pretty long on those?

Steve Menzies

I prefer not to comment about specific commercial terms on our leases.

Paul Bodnar – Longbow Research

Okay. Thanks a lot, guys.

Operator

The next question comes from the site of Sal Vitale with Sterne Agee. Please go ahead; your line is open.

Sal Vitale – Sterne Agee

Good morning all. I guess the first question is on the lease side, just trying understand the guidance you gave there. So basically, you're saying $0.03 to $0.04 per share of lease gains in 1Q, and that works out to about $4 million to $5 million. So, I'm just trying to get sense for how that compares to 4Q. In 4Q, it was more like $0.14 or $0.15, $18 million. So, what was so unique about 4Q? I mean, was it that you just saw the opportunity to sell cars at attractive prices, and could you see another type of quarter maybe, not $18 million, but, say, something like a $10 million quarter at some point this year? I mean, is your guidance just a little bit on the conservative side as it

pertains to that?

Tim Wallace

James why don't you take that?

James Perry

Sure Sal, I'll tackle that for you. The guidance we give is where we see the market right now and the secondary market conversations we're having. Clearly, the fourth quarter was higher than we saw in the third quarter and we're projecting right now. We did have a lot of good opportunities in the fourth quarter. It allowed us to do some diversification to achieve some nice returns, and as we see opportunities, just like in the manufacturing side, that are attractive for us to take part in the secondary transactions, we'll certainly look at those very carefully if they fit the different goals we're trying to achieve.

So, we would tell you this is where we see things right now. We wanted to be sure you had an understanding of what was embedded in our guidance, and if we have adjustments to that as we go forward in the year, each quarter, as we update our guidance on these calls, we'll provide that detail.

Sal Vitale – Sterne Agee

Okay, that's helpful. Then, also another question on the lease side, can you give us a sense of, and I'm sorry if you already mentioned this earlier, but how much of your, and I guess overall between TRIP and your core lease fleet, your overall lease fleet, what percentage of the leases, of the cars under lease, are coming up for renewal this year? And to follow-up on that, roughly how far below the market are they currently?

Tim Wallace

James?

James Perry

Yeah, I'll handle that. The first part of your question, how much is up for renewal, the average lease remaining term in the overall portfolio is about three and a half years, so that would tell you that about one-seventh or kind of that 15% ball park renews in a given year. We don't have any given year where that is abnormal. We don't get real specific on that but I don't think this year is going to be abnormal versus the last couple of years or the next couple of years, given that remaining lease term.

The second part of your question, how much of that is under market per se, we certainly don't get into that. As Steve said, we are seeing renewal trends favorable and new lease terms favorable but it's really hard to dissect, nor would we, for competitive reasons, dive too much into specific lease pricing or what may be up for renewal.

Sal Vitale – Sterne Agee

OK. Then if I could just switch over to the manufacturing side for a moment, if I look at the guidance of 18,000 to 20,000 cars for the year, what would you say could account for the variability in that range? Is it mostly on the energy side, the shale play?

Tim Wallace

Steve?

Steve Menzies

Sure, Sal, Steve Menzies. Well, first of all, we have commercial risk in that we do still have open production spots and order places yet to be sold this year. So that is a variable that kind of heads the list as far as what determines the 18,000 to 20,000 range. And we still are experiencing operating efficiency growth and we still have productivity growth. So our operations group, while improving, still has more improvement to make, and there are certainly continued challenges in that. The last thing, I would say, is supply chain. While today, we've not had any major supply chain interruptions, the supply chain is still very tight, and they, too, are struggling to ramp up their operations. So I would look at those three components as major variables to our production output for this year.

Sal Vitale – Sterne Agee

Okay. Thank you. That's helpful.

Operator

Our next question comes from the site of Zahid Siddique with Gabelli & Company. Please go ahead; your line is open.

Zahid Siddique – Gabelli & Company

Hi, good morning. My first question is on the wind customer. I know you won't comment on the specifics, but you did, in one of the press releases, indicate that you have a backlog of about roughly $410 million with regards to this customer. How much of that is in production? I'm trying to kind of put a handle on the actual cost on your end.

Tim Wallace

James?

James Perry

Sure, sure. This is James. When you look at that lawsuit that was filed and the press release and the details there, we did indicate that we did not have any production capacity right now reserved for fulfilling orders from that backlog, given we don't have those commitments in hand. So that is in the backlog as there's a firm commitment from that customer to buy wind towers from us, but right now, we don't incorporate that as part of our guidance, given the production planning that we have.

Zahid Siddique – Gabelli & Company

OK. So, in the extreme case, you wouldn't really be losing anything, there. It's just the incremental gain that you're worried about, if I understand.

James Perry

I think that 's fair. We certainly have wind tower capacity that we're filling with orders that we have, but right now we don't assume there's any production space dedicated to that backlog.

Zahid Siddique – Gabelli & Company

OK and my next question is on the fracking and oil and tar business. How much of the cars, either in the backlog or in orders, are related to those businesses?

Steve Menzies

Zahid, this is Steve Menzies. We don't disclose specifics about our backlog by car types or customers, but certainly it's had a significant impact on the entire industry, both in deliveries in 2011, as well as order backlog for 2012.

Zahid Siddique – Gabelli & Company

OK. Last question is on the Q1 guidance. I guess back in Q3 when you guided Q4 you said $0.38 to $0.43, and you came out at $0.56 if you adjust for the gains. Why for Q1 $0.43 to $0.48 when, I guess, your orders are higher, your backlog is better, you know, why not for Q1 say, you know, $0.55?

Tim Wallace

James?

James Perry

James. Sure and I think we highlighted a couple of specific things. If you look quarter-over-quarter, the level of car sales we are anticipating is lower. That's where you had in the mid-teens range on an earnings per share. This quarter we're projecting $0.03 to $0.04. We're also projecting slightly more EPS elimination of profit as we ship more cars to the lease fleet first quarter versus fourth quarter.

Otherwise, the business is as we've projected, the margins and revenues are up and down a little bit, but those are the two big changes I think I'd highlight quarter to quarter.

Zahid Siddique – Gabelli & Company

OK. So it's about a $0.10 delta on the gains and maybe some other on the eliminations?

James Perry

Those are the primary items that we've highlighted, yes.

Zahid Siddique – Gabelli & Company

OK. Thank you so much.

James Perry

Thank you, Zahid.

Operator

I see no further questions at this time. I would now like to turn the call back over to our speakers.

Gail Peck

That concludes today's conference call. A replay of this call will be available after 1:00 Eastern standard time today through midnight on February 23rd, 2012. The access number is 4022200120. 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 does conclude today's teleconference. You may now disconnect and have a great day.

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