Trinity Industries' (TRN) CEO Tim Wallace on Q2 2016 Results - Earnings Call Transcript

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Trinity Industries Inc. (NYSE:TRN) Q2 2016 Earnings Conference Call July 22, 2016 11:00 AM ET

Executives

Gail Peck – Vice President Finance and Treasurer

Theis Rice – Senior Vice President and Chief Legal Officer

Tim Wallace – Chairman, Chief Executive Officer and President

Bill McWhirter – Senior Vice President and Group President-Construction Products, Energy Equipment, and Inland Barge Groups

Steve Menzies – Senior Vice President and Group President-Rail and Railcar Leasing Groups

James Perry – Senior Vice President and Chief Financial Officer

Analysts

Matt Elkott – Cowen and Company

Allison Poliniak – Wells Fargo

Justin Long – Stephens

James Bardowski – Axiom Capital

Matt Brooklier – Longbow Research

Willard Milby – BB&T Capital Markets

Bascome Majors – Susquehanna

Operator

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 fact 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 risk, a change in any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statement.

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

Gail Peck

Thank you, Tanisha. Good morning, everyone. Welcome to the Trinity Industries’ Second Quarter 2016 Results Conference Call. I am Gail Peck, Vice President Finance and Treasurer of Trinity. Thank you for joining us today. Similar to the format we have used on our recent earnings calls, we will begin with an update on the Highway Products litigation matter. We will then follow with our normal quarterly earnings conference call format.

Today’s speakers are Theis Rice, Senior Vice President and Chief Legal Officer; Tim Wallace, our Chairman, Chief Executive Officer, and President; Bill McWhirter, Senior Vice President and Group President of the Construction Products, Energy Equipment, and Inland Barge Groups; Steve Menzies, Senior Vice President and Group President of the Rail and Railcar Leasing Groups; and James Perry, our Senior Vice President and Chief Financial Officer. Following their comments, 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 Theis Rice.

Theis Rice

Thank you, Gail, and good morning, everyone. Today, I will provide a brief update on the litigation involving our Highway Products. As previously reported, we appealed the October 2014 adverse judgment we received in the False Claims Act case filed in the Eastern District of Texas involving our ET Plus guardrail and terminal system to the United States Court of Appeals for the Fifth Circuit. Yesterday, we filed our reply brief. This concludes the briefing phase of the appellate process.

We believe our briefs present compelling arguments why this case should not have been brought to trial from the start, and why the judgment should be reversed. For those who are interested in reviewing the brief we have filed in this case and the amici briefs filed supporting our appeal, the documents can be found at etplusfacts.com. We anticipate that oral arguments, if granted by the Fifth Circuit, will take place this fall followed by a ruling from the Court no earlier than late 2016.

Trinity Industries and Trinity Highway are also named in a number of other suits that we believe are groundless, and represent opportunistic filings that seek to capitalize on the False Claims Act judgment now on appeal. For a more detailed review of these suits, please see Note 18 to the financial statements in Trinity’s Form 10-Q for the period ended June 30, 2016. Please also refer to etplusfacts.com for additional information.

I will now turn the call over to Tim.

Tim Wallace

Thank you, Theis, and good morning everyone. Our second quarter financial results are in line with our expectations. They reflect our ability to make quarterly transitions when market conditions shift. Our people are demonstrating operating flexibility as they confront the challenges associated with today’s business environment. Given the diversity of Trinity’s portfolio of businesses and the uncertainty within various sectors of the industrial economy, I anticipate each quarter will have unique challenges.

The oversupply of railcars and barges has continued to keep demand for new equipment at lower than normal levels. I am pleased with the $940 million order we received for wind towers in the second quarter. Our electric transmission towers business is experiencing early signs of improvement in demand for its products, and our construction products businesses are doing well.

Timing plays an important role in today’s market. Strategic buyers of large capital goods historically place orders during markets with low demand levels. They closely monitor economic conditions and look for attractive pricing on orders. Our businesses are highly focused on engaging with customers, so they will be positioned to negotiate transactions when customers need our products. The backlogs, our business has built during the recent upcycle, have been instrumental for an orderly transition to lower production levels.

In addition, the growth of our railcar leasing business and the diversification of our manufacturing businesses are providing value. Contractions in businesses are never pleasant. When we make reductions in the size of our business, we always keep in mind the human aspect associated with these decisions as well as the long-term effects. Our decisions affect the lives of our employees and their families as well as the future of our Company. We take this responsibility very seriously.

Our businesses know how to operate in fluctuating markets and I am highly confident in our ability to successfully navigate through various stages of the business cycle. During my 41 years with the Company, we have experienced a number of business cycles. In my opinion, Trinity is much stronger today both operationally and financially than we have been in previous downturns. In the current market environment, our near-term priorities center around cost control, obtaining orders, and opportunistic investment.

First, we are highly focused on repositioning, streamlining, and aligning our manufacturing operations and cost structure with current market demand. We have historically emerged from a downturn as a stronger company with new ideas and methods for operating at lower cost level. Secondly, our team is focused on utilizing our manufacturing flexibility to obtain orders for our products. And finally, we continue to dedicate resources to identify new opportunities that align with our corporate vision of being a premier diversified industrial company. I am confident in our abilities to improve our Company as we successfully navigate the current complexities within our business environments.

Our corporate business model is designed to generate value through our ownership and management of industrial companies that benefit by being part of Trinity. We have a history of accumulating cash during strong market cycles, so we are positioned to make strategic investments during weaker cycles. Today, our strong balance sheet positions us to be opportunistic. In the area of acquisitions, we are utilizing an opportunistic approach similar to the strategic buyers of capital goods I mentioned earlier.

We continuously search, analyze, and discuss acquisition opportunities that fit our criteria. We look at businesses that have products, services, technology, and competencies that will enrich our industrial manufacturing platform as well as our railcar leasing business. We are disciplined in our approach. We wait until we believe timing is right then we move opportunistically. Right now, we do not have anything that we are close to announcing. In the past, when demand for industrial products has stayed at low levels for extended period of time, interesting opportunities have surfaced. We are closely monitoring this situation.

Overall, I am pleased with the Company’s ability to successfully transition when market conditions shift. We strive to do our best in every market environment and constantly work at strengthening our Company’s competitive position. Our accomplishments are due to the capabilities and expertise of our dedicated employees, our ability to respond effectively to shifts in demand, and our ongoing commitment to provide high-quality products and services to our customers.

I will now turn it over to Bill for his comments.

Bill McWhirter

Thank you, Tim, and good morning, everyone. The continued solid performance on our construction materials business and the positive effects of the Federal Highway Bill that Congress approved last December favorably impacted the second quarter results of the Construction Products Group. The Group’s operating profit, excluding a gain of $7.8 million from an asset sale on the second quarter of 2015, increased approximately 60% year-over-year on a slight decline in revenues. Our aggregates business has been positively impacted by increased infrastructure related work and population growth within our primary markets.

Now moving to the Barge Group, the market for new barges for both dry and liquid cargo remains weak as the supply of available barges continues to outpace demand. The strength of the U.S. dollar continues to negatively impact the export market for agricultural products and the decline in domestic oil production has resulted in a significant overhang of tank barges. The Barge Group received approximately $51 million in orders during the second quarter, resulting in a total backlog of $251 million at the end of the quarter. The team is focused on securing orders for the first half of 2017 and beyond.

Our barge business is planning for a continued decline in production through the balance of the year as we deliver our current backlog. The manufacturing flexibility incorporated into our facilities in recent years has positioned our barge team to respond quickly to changes in market demand. The Energy Equipment Group delivered a solid improvement in operating margin during the second quarter compared to last year, primarily as a result of improved efficiencies in the wind tower business. Our container product lines continue to be impacted by the low price of oil and natural gas.

During the second quarter, we announced the receipt of a $940 million wind tower order that will begin shipments in 2017. At the end of the quarter, our wind tower backlog was more than $1.1 billion. Our manufacturing flexibility positions us to quickly adjust our wind tower production capacity. We are currently in the process of converting a facility to respond to the recent increase in demand. In our utility structures business, we are seeing some early indications of an uptick in demand.

Over the long-term investment forecasts for electricity transmission spending remains positive. The recently passed federal tax incentive for wind power is expected to drive the development of additional transmission infrastructure.

In closing, our businesses are responding effectively to mix demand conditions. Our positive long-term outlook for energy and infrastructure investment in North America underscores the value of the investments we have made in these businesses. Now I will turn the presentation over to Steve.

Steve Menzies

Thank you, Bill good morning. The second quarter operating results for TrinityRail were in line with our expectations and reflect the transition continues to adjust to weak railcar demand. The rail group delivered more than 6,000 railcars and a 12.8% operating margin during the quarter, while simultaneously executing a challenging schedule of production line changeovers. The Leasing Group continued to expand our lease fleet and RIV platform by adding new railcars to our wholly owned portfolio and selling leased railcars to institutional investors.

Weak industrial end-user markets, a large American railcars, and excess railcar industry manufacturing capacity continue to negatively impact new railcar orders and pressure lease fleet utilization and rates. TrinityRail is focused on aligning our production footprint to current market demand conditions, implementing cost reduction initiatives and maintaining lease fleet utilization.

Our rail group received orders for 2,910 railcars during the second quarter. We received orders from industrial shippers, lessors, and railroads. The orders we received represent a mix of tank cars, open-top and covered hoppers, and auto racks serving the chemical, petrochemical, agricultural, construction materials and automotive industries.

These orders reflect pockets of demand within these industries and attrition of the aging North American railcar fleet. Our order backlog at the end of the second quarter was approximately 40,205 railcars valued at $4.3 billion. Our orders and backlog highlight the breadth of the TrinityRail product line and manufacturing flexibility of our production footprints. With orders received in the second quarter, our entire planned 2016 production schedule of approximately 27,000 railcars is sold and we are focused on securing additional orders for 2017 production and maximize production continuity and enhanced productivity.

We do have the capacity to meet customer demand for additional 2016 railcar deliveries. We have worked with our frac sand customers to defer deliveries of small cube covered hoppers in our backlog. In most cases, we have received economic consideration for deferring deliveries. We are monitoring this market very closely as sand producers are optimistic following the improvement in oil prices over the last quarter.

Feedback from frac sand producers suggests that further strengthening of oil prices in addition to new fracking techniques that require more sand usage per well may trigger growth in sand demand. So projections provide an optimistic view for a potential recovery in frac sand demand in late 2017 or early 2018.

Current railcar order inquiries remain consistent with the last few quarters. It is too early to indicate a market turnaround, but demand conditions seem to have stabilized at current levels. It is unlikely that a market turnaround will occur until industrial production levels improve and the overhang of surplus railcars is diminished. The current level of new car order inquiries as well as ongoing weak railcar industry fundamentals suggests industry railcar production will decline in 2017.

During the second quarter the rail group delivered 6,065 railcars, a 15% decline from the first quarter. As expected our operating and financial performance was heavily impacted by the significant change in product mix delivered during the quarter and resulting inefficiencies brought on by major production line changeovers.

For the second half of 2016, we anticipate margins to improve slightly from this quarter’s level as our production plan stabilizes in the balance of the year, offset by lower pricing on recently sold fourth-quarter production slots. We are also making adjustments to our production capacity to align with lowered railcar demand. Necessary capacity reductions must be implemented carefully to ensure we can deliver our backlog and still maintain the flexibility to pursue orders for a broad range of railcar types.

I am pleased with our maintenance services team’s performance completing our initial round of HM-251 modifications for our lease fleet, and beginning in the second quarter, for third parties. Our maintenance services facilities have been extremely busy providing regulatory and compliance services for our owned and managed fleets as well. With our maintenance capacity expansion over the last two years, we are focused on bringing more our lease fleets requirements into TrinityRail facilities to better control costs and improve throughput.

Amidst the current railcar market conditions, the significant scale of our lease fleet provides a unique platform for growth as well as a stable base of earnings and cash flow that helps mitigate declining manufacturing earnings. Lease fleet utilization at the end of the second quarter declined to 96.4% for our wholly owned fleet. The overhang of existing railcars in the marketplace and weak industrial market demand is placing pressure on renewals and causing declines in lease rents.

However, certain markets are more pressured. During railcar market downturns, we typically focus on shorter lease terms on lease renewals in anticipation of repricing the lease railcar in a more favorable market environment. During the quarter, the Leasing Group completed another sale of a portfolio of railcars to institutional investors within our RIV platform in the amount of $149 million.

In the current market, we continue to balance and evaluate the economic returns generated by selling these railcars to our RIV platform versus maintaining the lease railcars in our wholly owned portfolio. Our total owned and managed lease portfolio now stands at 99,690 railcars after the delivery of 2,470 leased railcars from our rail group in the second quarter RIV portfolio sale. Our committed leased railcar backlog of $1.2 billion was for additional growth for our owned and managed lease portfolio in 2016 and next year.

In summary, TrinityRail’s operating and financial flexibility and leading market position give us confidence we can effectively adapt to rapidly changing market conditions. We are well prepared to execute in the current market environment. The investments we have made in our facilities, manufacturing processes, fleet maintenance capabilities, and owned and managed lease fleet position us to elevate TrinityRail’s performance throughout the entire business cycle.

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

James Perry

Thank you Steve and good morning everyone. Yesterday, we announced our results for the second quarter of 2016. For the quarter, the Company reported revenues of $1.2 billion and earnings per share of $0.62 compared to revenues of more than $1.6 billion and EPS of $1.33 for the same period last year. The decline in year-over-year performance was primarily due to three factors: a 61% decrease in operating profit for the rail group resulting from 29% fewer deliveries during the quarter, significant product mix changes in the rail group; and lower deliveries and profit from the Inland Barge Group.

The construction products and Energy Equipment Groups reported historically strong results for the quarter, partially offsetting the lower results in the rail and barge groups. We remain highly focused on cost reductions. Our SG&A has declined year over year. We continue to see cost reductions at the corporate and operating levels across the Company. During the second quarter, we invested in new railcars with the value of $252 million that were added to our wholly owned lease portfolio. This brings our six-month total to $535 million, and we expect the full-year total to be $1.1 billion with a cash investment of approximately $880 million due to the embedded deferred profits.

During second quarter, we invested $54 million of capital expenditures across our manufacturing businesses and at the corporate level. For the first six months, we have invested $80 million in these areas, and we expect to invest $140 million to $180 million for the full year. We had not repurchased any of our shares during the second quarter, and have repurchased $35 million during the first six months.

We ended the second quarter with $814 million of cash, cash equivalents, and short-term marketable securities. We have access to additional capital through our $600 million corporate revolver, of which $93 million is currently consumed by letters of credit as well as our $1 billion leasing warehouse facility of which $241 million is currently outstanding.

At the end of the quarter, our available liquidity position was approximately $2.1 billion. I want to make a few comments about the economic environment in the markets we serve and our expectations for full-year results. Ongoing weakness in many of the markets we serve continues to make this year more challenging than the last few years. Order levels remain low in some of our lines of business.

Product mix changes and costs associated with aligning our production levels with demand will continue to negatively impact margins this year. It is difficult to precisely predict the magnitude of timing of these impacts on each quarter’s results. Our overall earnings guidance for 2016 of $2 to $2.30 is unchanged from last quarter’s guidance.

Our earnings guidance assumes there is no improvement in market conditions for our businesses for the rest of the year. Our annual EPS guidance also includes the following assumptions: a tax rate of approximately 36%; corporate expenses of $120 million to $140 million, which include ongoing litigation-related cost; the deduction of approximately $15 million of non-controlling earnings due to our partial ownership in TRIP and RIV 2013; a reduction of approximately $0.08 per share due to the two-class method of accounting compared to calculating Trinity’s EPS directly from the face of the income statement; and no dilution from the convertible notes based on the current stock price.

We continue to expect our rail group to deliver approximately 27,000 railcars in 2016. We are maintaining our annual revenue guidance for the rail group of approximately $3.1 billion. We expect an operating margin of approximately 14.5% for this group in 2016. In 2016, we expect to eliminate approximately $1.1 billion of revenues related to railcar sales to our leasing company. We expect to defer approximately $190 million of operating profit.

These revenue eliminations and profit deferrals result from the accounting treatment of sales from our railcar manufacturing company to our railcar leasing company. For 2016, we continue to project Energy Equipment Group revenues of approximately $1 billion, but are increasing our operating margin guidance from 12% to approximately 13%. We were pleased to announce during the second quarter a three-year order for $940 million of structural wind towers with shipments beginning in 2017. Our 2016 guidance is not impacted by this new order.

As compared to our prior guidance, we now expect lower revenues of approximately $540 million for our Construction Products Group in 2016, but with an improved operating margin of approximately 12%. Our Inland Barge Group guidance remains unchanged. We expect annual revenues of approximately $420 million in 2016, with an operating margin of approximately 11%.

In 2016, we expect our Leasing Group to record operating revenues, excluding leased railcar sales, of approximately $690 million, with profit from operations of approximately $295 million, both of which down slightly from our prior guidance. During the second quarter, total proceeds from the sales of leased railcars to the railcar investment vehicle platform were $149 million with a profit of $43 million. All of these railcars were sold from our wholly-owned lease fleet.

In accordance with current industry policy and practice, $118 million of the proceeds was reported as revenues due to the railcars having been in our lease fleet for less than one year. The remaining $31 million is reported on our cash flow statement as proceeds from sales of railcars owned more than one year in our fleet. As we have said, the level of sales of leased railcars will vary on a quarterly basis due to their transactional nature.

Our guidance includes the sale of between $300 million and $400 million of leased railcar sales to the RIV platform in 2016, which results in a range of sales of between $130 million and $230 million during the second half of this year. At this time, we are not providing operating profit guidance associated with these sales or the quarterly cadence due to the fluid nature of these transactions.

In conclusion, we maintain a strong balance sheet and significant liquidity. These factors allow us to be opportunistic and flexible as we continue to seek internal and external investment opportunities to enhance shareholder value. We are confident that Trinity will continue responding appropriately to market conditions as we pursue our vision to be a premier diversified industrial company.

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

Question-and-Answer Session

Operator

Thank you [Operator Instructions] And we’ll go ahead and take our first question from Matt Elkott with Cowen and Company. Please go ahead. Your line is open.

Matt Elkott

Thank you for taking my question. I’m going to start with a question on the construction products business, actually. It looks like your profit margin on that business was the highest in two years, since 2Q 2014. Your revenue grew sequentially, but it was down year-over-year. Can you give us some more color on what aided the margin expansion? And how does that tied to the uptick in demand from the construction – from the Highway Bill in December? And what it means also for your aggregate railcar business?

Theis Rice

Bill?

Bill McWhirter

Yes, so, let me start with the revenue, because the revenue can be a bit misleading. We did sell a business last year that had contributed $6.2 million in revenue in the second quarter of 2015. So when you eliminate that, you’ve got a little bit better growth in revenue, but you are dead on, the margin has improved considerably and I really look at it on a couple of fronts. One is over the past year, and in particular in our highway business, we have spent a lot of time on the cost associated with our facilities and rightsizing the business to the relative market and I think that has been very successful.

On the aggregate side, over the past two, three years, we have made some really nice acquisitions in the lightweight business. And we’ve continued to just reposition that business to markets and products that we think enjoy a better margin. And so, it’s really a combination of a lot of events, but overall very proud of them. And you’re right. The Highway Bill itself sits in the background as a strong funding mechanism that we are starting to see positive signs associated with that.

Matt Elkott

Can you address the railcar?

Tim Wallace

Sure. And Matt, just to add to Bill’s, certainly we’ve seen increased demand for railcars to carry aggregates and other construction materials and received orders during the quarter for that business and have cars in our backlog for that business as well.

Matt Elkott

Okay, that’s great. I mean from your conversations with customers, do you get the sense that a lot of people are probably looking at the disappearance of the election uncertainty from the picture soon as maybe a time to make a long-term bet on infrastructure spending in the U.S.? I mean and that is something that may not materialize quickly, but it could be a multi-year thing. Is this where the strength in – the uptick in aggregate orders is coming from?

Tim Wallace

This is Tim. I think it’s premature to try to anticipate what may happen as a result of the elections. We’re still right in the early stages of that. Steve, do you have any comment?

Steve Menzies

The conversations I’ve had with customers, I think the biggest driver for their business is overall industrial demand, price of oil, price of interest rates, level of interest rates. And those are the things really driving their businesses.

Matt Elkott

Okay. And just lastly, very quickly, the 50 railcars that were canceled in the quarter, can you tell us what the end market was? And is there any indication that there could be more in that market or other markets?

Steve Menzies

Yes, thanks for the question, Matt. This is Steve. That was a customer that went into bankruptcy and therefore defaulted on their obligations to take those railcars. Those were tank cars for vegetable oil service. I think that’s a unique circumstance and I don’t view that as any pattern for our business.

Matt Elkott

Great, thank you very much.

Operator

Thank you. And our next question comes from Allison Poliniak with Wells Fargo. Please go ahead, your line is open.

Allison Poliniak

Hi, guys, good morning. You touched quite a little bit on sort of this thought of stabilization on the industrial side. Now, clearly, there is some overcapacity and such. But when we look at your backlog, could you help us maybe understand that duration of the backlog? Are folks getting a little more comfortable as you look into 2017 and 2018 in terms of taking that equipment on, just given the overcapacity today?

Steve Menzies

Sure, Allison. This is Steve. First of all, our backlog does extend through periods of 2020. It is dispersed through that time period. We have confidence that we will build our backlog over that time. Keep in mind that in our backlog, we have orders that are direct sales to industrial companies and railroads and that the leasing market is not the sole source for our orders in our backlog.

And that view that we have of the marketplace from selling railcars as well as leasing really gives us an enhanced view of the entire railcar market. As I’ve mentioned many other times, we have a diverse of backlog of serving a number of different markets well outside the energy sector, which seems to be a heightened focus for analysis, but we are serving a number of different markets with our backlog.

Allison Poliniak

No, that’s great. That’s helpful. And then just a tick down in EBIT margin for rail, what’s driving that difference relative to last quarter’s expectations? Can you touch on that?

Steve Menzies

Sure. Really, the very major shift in our product mix as well as some significant line changeovers during the quarter did have adverse impact on our performance during the quarter.

Allison Poliniak

Okay. And then just to touch on just that line changeovers, are they fairly through for 2016 at this point in terms of delivering for the back half? Or are there more line changeovers to think about there?

Steve Menzies

We don’t have additional line changeovers to the magnitude that we had in the second quarter plan for the rest of the year, so I think our production plan is stabilized. But I would point out that we have now production slots have been filled for later parts in our fourth-quarter delivery that were railcars that were sold recently at weaker market levels. That will have a negative impact as well.

Allison Poliniak

Thanks so much.

Operator

Thank you. And our next question comes from Justin Long with Stephens. Please go ahead. Your line is open.

Justin Long

Thanks and good morning. With the wind tower announcement in the quarter, I was wondering if you could speak to your available capacity in that market. You mentioned in the prepared remarks that you’ve got one facility that could be shifting to build wind towers. But how many total wind tower facilities are you planning to operate? And could you just speak to your ability to flex up if we see incremental orders from here?

Bill McWhirter

This is Bill. I think the secret to the answer is we have a lot of ability to flex up; giving Trinity’s overall footprint and the number of plants that can make multiple products. So it’s difficult to say it’s five plants or it’s six plants. I think the real answer to the question is we take plants one at a time that we think are best suited to handle the additional volume. And we keep pursuing volume in the market to the extent that we have facilities that we think could be in an idle position, keep a workforce together, and produce the products accordingly. So by no means would I classify ourselves as full based on this order.

Justin Long

Okay, great. That’s helpful. And how should we think about the margin profile for the wind tower business? I know you don’t break that out specifically, but high level, should it be accretive or dilutive to the margin percentage within that energy equipment segment?

Bill McWhirter

I think at a high level, it is relatively consistent with the margin that already exists within the segment as a whole.

Justin Long

Okay, great. And I will maybe ask one more. One thing you’ve talked about this year is the mix headwind related to railcar deliveries. I know it’s still a little bit early to talk about next year, but based on what you have in the backlog today, how would you guess railcar mix trends directionally in 2017? Do you think it should start to stabilize or is there risk that mix takes another step down next year?

Steve Menzies

Justin, this is Steve. Really hard to say; orders shift, markets shift over time. We’ve had a significant shift from tank cars to freight cars over this year, and I would expect that trend to continue and perhaps see more normalized levels of tank car production going forward.

Justin Long

Okay, great. I will leave it at that. Thanks for the time.

Operator

Thank you. And we’ll go ahead and take our next question from Gordon Johnson with Axiom Capital. Please go ahead, your line is open.

James Bardowski

Hey, guys. This is James Bardowski in for Gordon. Thanks for taking my questions. I guess first, just following up on the wind tower order – congratulations on that, by the way. It’s a nice accomplishment. If we assume a 14% EBIT margin in applying today’s share count, I think it’s about roughly $0.89 in cash EPS. Do you expect to realize that more towards the beginning of the three-year period evenly or more towards the end?

Bill McWhirter

I think difficult to say what the cash realization is going to be over a period of time. Obviously we’ll have a moment in time where we’ve got to ramp up the working capital, and then we will have a moment in time where the working capital dissipates towards the end. The order itself is relatively even throughout the three-year period, but not exactly even. So there definitely are quarters where we have more production demand and quarters where we will have a little less demand.

James Bardowski

Okay, that’s very helpful. And then I guess turning towards your 2016 guidance. Clearly you reiterated it at $2 to $2.30. Looking at 2H, basically it implies that 2H earnings are going to be lower than 1H clearly. I think it’s like $0.45 per share linearly. But with freight volumes still falling, coal demand, which is I think 30% of last year’s total volumes, likely not coming back, agricultural shipments hurting from a stronger dollar. And also, if I heard you correct, I am not sure if I transcribed this correctly, but it sounds like you slightly lowered your revenue outlook for the construction and the Leasing Group? I guess basically what gives you confidence that you can still meet this full-year guide?

James Perry

This is James. The guidance takes into account a lot of pieces. As we said, we did give you our updated guidance for revenue and margins. In some areas, it was slightly down; in some areas, it was slightly up. This incorporates where our current view is of the product mix for the back half of the year and the backlogs we have, the costs associated with rightsizing our production footprint in the various businesses, mix changes and cost associated with that, as well as where the industrial economy is and our expectations for the rest of the year.

In several businesses, it’s simply a matter of some volume or mix changes as we go through our facilities the next two quarters. And as we mentioned earlier and Steve mentioned specifically in rail, some of these orders were taken earlier this year at lower margins, lower pricing that we’ll be delivering in the back part of the year.

The guidance range also anticipates where we think that we will be in terms of sales of leased railcars. We have a pretty wide range of guidance there. And so there’s still some uncertainties in the business where precisely we’ll be. But the $2 to $2.30 we still feel comfortable with that range.

James Bardowski

Thanks. And then looking at your RIV portfolio, can you guys tell us what you are seeing in terms of the fleet utilization for that managed fleet? Basically is this comparable to Trinity’s wholly owned fleet?

James Perry

This is James. We don’t publish those type of numbers. I would point out that as cars go into the fleet, they are fully utilized at the outset. But some of those fleets are becoming a little more mature, but we don’t publish the number for the managed but not owned or partially owned cars.

James Bardowski

Yes, understandable. And for those cars, are they similar durations – lease durations that the wholly owned fleet offers?

Steve Menzies

Yes, James, Steve Menzies. The diversification and length of term of leases would be of very similar in profile to our wholly owned portfolio.

James Bardowski

Okay, great. Thank you, gentlemen. I guess just a couple of more quick ones. A bit of a housekeeping question: can you just remind us what pushed up the maintenance cost in the Leasing Group? I think it was the last three quarters? And also where you see this expense going in 2H.

Steve Menzies

Sure. Steve again, James. First of all, we – each quarter, our fleet gets older and older, and as the fleet gets older, you have increased maintenance requirements. We also have a high level of regulatory and compliance requirements for the fleet as we go forward. I would also tell you that given the weakness in the market, we are seeing higher maintenance expenses to support our commercial activities to reassign our fleet and to keep the fleet fully employed.

James Bardowski

Excellent. Thank you, Steve. I will jump back in queue. Thank you, guys.

Steve Menzies

Thank you.

Operator

Thank you. And our next question comes from Matt Brooklier with Longbow Research. Please go ahead, your line is open.

Matt Brooklier

Yes, thanks. Good morning. The lease fleet utilization deterioration on a sequential basis during 2Q, can you give me a little bit more color in terms of what weighed on the fleet during the quarter?

Steve Menzies

Sure. Matt, Steve again. To no surprise, railcars that we have operating in energy sector, particularly coal and crude oil, we are seeing significant pressure to keep those cars employed. And I would cite that as probably the weaker part of our fleet from a utilization standpoint.

Matt Brooklier

Okay, understandable. And what – I guess what percentage of the fleet right now is represented by coal cars?

Steve Menzies

We typically don’t break out the composition of our lease fleet.

Matt Brooklier

Okay. And then just turning back to the wind tower language and some of the earlier questions, the facility or facilities that you are booking to transition to meet the demand and what’s in the backlog. Can you talk to what, maybe provide a little bit more color on what types of facilities those are, if it is former railcar facilities or storage tank facilities? Just trying to get a sense for how the – your manufacturing footprint is shifting into this order.

Bill McWhirter

So, two of the facilities are currently just wind tower facilities, that are achieving a very high level of production based on a lot of lean activities that have occurred at those facilities over the last three, four, five years. The third facility was a Trinity multiuse facility, so it was a facility that participated in making part of a tank car and making very large storage tanks and making some wind towers. So as it moves to being primarily a wind tower facility, it times well with the idling down of some of the tank car business and times well with a slower market on the container side based on the activity associated with oil and NGLs in particular.

Matt Brooklier

Okay, that’s good color. Appreciate the time.

Bill McWhirter

Thank you.

Operator

Thank you. And we’ll go ahead and take our next question from Willard Milby with BB&T Capital Markets. Please go ahead, your line is open.

Willard Milby

Hey, good morning everybody. You mentioned you were working with customers that have ordered frac sand cars looking to extend those deliveries. Can you remind us what percentage of your backlog that represents, if you are willing to disclose that?

Steve Menzies

Well, this is Steve. We have not provided that information and have not.

Willard Milby

Okay. And on I guess rail group deliveries for rest of this year, can you provide some color on delivery cadence there with Q3, Q4? And same question on the margin for those quarters?

Bill McWhirter

Sure. Again, we have confirmed our approximately 27,000 deliveries for the year. Obviously we are going to have to ramp up from our 6,000 delivery units in the second quarter. And I would suggest that they’re fairly evenly delivered over the third and fourth quarter, with maybe a few more in the fourth quarter.

Willard Milby

All right. And so similar assumptions with the margin on those?

Bill McWhirter

I think that’s fair, Will.

Willard Milby

All right. And with the – I guess the adjustment on the leasing performance, not the sale of railcars, but the core leasing business kind of having a weaker second half compared to first half. Is that going to be more a utilization issue or a rate-per-car issue?

Steve Menzies

It’s probably a function of both, and we are certainly going to continue to be challenged to keep energy sector cars employed. There’s a lot of pressure on utilization and lease rates both. So I would expect that both would contribute to margin compression.

James Perry

Willy this is James. We provide that guidance, obviously we now have in the rearview mirror what we’ve renewed in the second quarter, what we added as well as a little bit in the third quarter. So it’s just a current perspective of where things are.

Willard Milby

All right. And one quick housekeeping thing. Did you update full-year CapEx from $150 million to $200 million? Did that change at all?

James Perry

We changed that to $140 million to $180 million, down just a little bit from previously.

Willard Milby

All right. That’s it for me. Thanks very much.

James Perry

Thank you.

Operator

Thank you. And we’ll go ahead and take our last question from Bascome Majors with Susquehanna. Please go ahead, your line is open.

Bascome Majors

Thanks for squeezing me in here. You said that your full 27,000 production plan was in backlog as of the end of the quarter. If I back out what you’ve guided to for the second half of the year, I am showing maybe 26,000, 27,000 cars in backlog today for 2017 and beyond. Can you give us an indication of the build plans and the cadence as we look forward? How much for 2017 is already in the backlog today, and once we get past 2017, how far do we stretch out? Is it lumpy or kind of straight line after that?

Steve Menzies

Bascome, this is Steve. Your math is correct. But at this time, we are really not prepared to go into details for 2017.

Bascome Majors

Okay. Maybe a higher-level question. We’ve heard from your customer in the leasing business about some of the pressures they are seeing. You’ve been pretty candid about some of the pressures you are seeing in lease rates and the overall weaker railcar market. But there seems to be a pretty significant steady amount of activity from portfolio investors looking to buy leased railcars.

Can you talk a little bit about where the demand is coming from, what you think is driving it, and maybe what kind of yields you are seeing on the transactions you are structuring for your customers in the last couple of quarters?

Steve Menzies

Sure, Bascome, this is Steve again. I think in this low interest rate environment, there is a number of different types of financial institutions that are seeking yield. And I think they see that hard assets such as leased railcars can provide that type of yield and also potentially provide an inflationary hedge, should we see long-term inflationary pressures. So these are very attractive investments on a long-term basis for insurance companies, pension funds, and those are the type of people we’re typically working with in large part. So they continue to express a lot of interest in these assets and see them as really valuable long-term investments.

Bascome Majors

And with financing terms out there today and lease rates where they sit, can you give us just a directional indication as to what kind of yield you are seeing people achieve on these types of transactions in today’s market?

Steve Menzies

It really would be hard to do that and give you a clear answer because it really changes with each type of investor. And so I think I would probably mislead you more than I would clarify for answering the question.

Bascome Majors

Okay. Well, appreciate the time today guys. Thank you.

Steve Menzies

Thank you.

Gail Peck

This is Gail. That concludes today’s conference call. A replay of this call will be available after 1 o’clock Eastern Standard Time today through midnight on July 29. The access number is 402-220-0682. 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

That does conclude today’s program. We would like to thank you for your participation. Have a wonderful day and you may disconnect at any time.

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