Trinity Industries Inc Q1 FY2020 Earnings Call

Good day everyone and welcome to the Trinity Industries First Quarter Results Conference Call. And at this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded and I will be standing by, if you should need any assistance. Today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and includes statements as to estimates, expectations, intentions and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain business issues and risks, a change in which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. It is now my pleasure to turn today's conference over to your Vice President of Investor Relations and Communications, Jessica Greiner. Please go ahead.

Thank you, David, and good morning, everyone. I'm Jessica Greiner, Vice President of Investor Relations and Communications for Trinity. We appreciate you joining us for the company's first quarter 2020 financial results conference call. We will begin our prepared remarks with comments from Trinity's Chief Executive Officer and President, Jean Savage; followed by Melendy Lovett, our Chief Administrative Officer. Eric Marchetto, the Company's new Chief Financial Officer will provide the financial highlights. We will hold a Q&A session following the prepared remarks from the leaders of our team. Joining the call today, we will refer to a few slides highlighting key points of discussion. These supplemental materials are accessible on our IR website at www.trin.net. These slides can be found under the Events & Presentation portion of the site along with the first quarter earnings call event link. It's now my pleasure to turn the call over to Jean.

Thank you, Jessica, and good morning everyone. The economic events and governmental action surrounding the Coronavirus are unprecedented. And I'm extremely proud of the response from the men and women at Trinity. TrinityRail is designated as an essential business by the North American federal authority. The executive leadership team and I, first and foremost would like to commend our employees for their service and commitment to health and safety, to business continuity, and to keeping critical supply chains operational. We thank you for your work, your spirit, and your dedication to excellence, which all reflect the strong culture and heart of Trinity. We'd also like to thank our customers, suppliers and all of the businesses working to ensure our communities stay safe and have access to all of our daily needs. Of course, we want to express our deepest appreciation for all of those on the frontlines in fighting COVID-19. We're most grateful for your commitment and service. We're proud of the function our employees and our railcars perform in sustaining our communities. Not only does the rail industry play an important role in preserving our planet as the most sustainable mode of land-based transportation, rail transportation is the livelihood of the North American economy. Railcars are a critical part of the supply chain of nearly every market. We all depend daily on food, treated water, energy generating commodities, and medical grade products. All goods are delivered through the rail supply chain. When the going gets tough, the tough get going. I believe Trinity's commitment to excellence and the rail platform will once again prove our ability to withstand an economic crisis. In my prepared remarks today, I want to cover three main points: the impact of COVID-19 on our business and our actions to address it; the financial resiliency of Trinity's railcar platform, our cost structure and liquidity position; and the strength of Trinity's leadership team to manage through this crisis; and our scenario assumptions for managing our business performance and capital allocation decisions amid market uncertainty. In the first two months of the first quarter, Trinity was executing on a number of optimization efforts, which we have previously communicated to the market. The purpose of these efforts was to improve our go-forward cost structure and decrease our cost of capital to accelerate our competitiveness in the marketplace. Certain of our COVID-19 response actions which I'll address next are highlighted in the supplemental materials on Slide 3. As the gravity of the implications surrounding COVID-19 began to unfold, Trinity's leaders took significant steps to protect the health and safety of our employees and to support the communities in which we live and operate. We instituted policies and procedures that adhere to CDC and WHO guidelines for social distancing, cleaning and sanitizing, restricting visitation at our manufacturing facilities, and establishing remote work arrangements for our corporate and services workforce. We restricted employee travel and have shifted most of our customer interactions to virtual methods. We have maintained our ongoing operations. To-date, we have not experienced any production delays in delivering products or services to our customers and we continue to work closely with our customers to understand their needs. Procurement teams have also monitored our supply chain for potential disruptions. And I'm pleased that they have been able to ensure continuity of operations to date. Our first tier suppliers are predominantly based in North America and have yet to be significantly affected by the restrictive flow of goods from other countries. We have established contingency plans should we begin to see major disruptions in our second and third-tier supply network. On our last conference call, we discussed the rightsizing actions we anticipated from the industrial slowdown and decline in railcar demand in 2019. In March, as we began seeing the impacts from COVID-19, we reevaluated the potential for lower railcar volumes and equipment demand in the near-term. As a result, we took additional action and further reduced our manufacturing workforce by 30% from year-end to align with our production capacity. Based on our current backlog visibility, we believe our manufacturing platform is appropriately sized to serve our customers. The second point I wanted to make sure we address today is our belief in the financial resiliency of Trinity's business model. During our COVID-19 preparedness actions, we extensively reviewed our financial models and assumptions, stress testing our balance sheet and liquidity against various scenarios as deep or deeper than those experienced during the financial crisis in 2009 and 2010. We'll go into more detail on the analysis later in the prepared remarks. During railcar down cycles, the long-term nature of the contracts in Trinity's leasing business protects the company from short-term market disruptions and are critical to the relative stability and cash flow generation of the company. There are also countercyclical aspects of our operational cash flow from working capital release given the highly variable cost structure of our manufacturing business. Another driver of value creation for our business model is the significant tax efficiencies that come from combining our leasing company and our manufacturing business. As we continue to grow the lease fleet, the accelerated depreciation of railcars offsets taxable income from our other businesses. The net operating losses generated are then generally carried forward to reduce future taxable income. The recently passed CARES Act further enhances the tax synergies of the rail platform. Trinity will utilize the tax losses generated in 2018 and 2019 primarily from accelerated depreciation associated with our lease fleet investment to recover taxes paid in prior years at higher tax rates. By year-end, we expect to receive $300 million in tax refunds resulting from the loss carryback provisions in the legislation. I could not have imagined that in my first few months as Trinity's new CEO, I would be leading this great company through one of the biggest financial and economic crises our markets have seen. Our leadership team has deep experience in managing through rail cycle volatility and they're prepared for the challenge at hand. Based on our current knowledge and analysis of market conditions, we believe Trinity's platform and cash generation capability can withstand the global pandemic and take advantage of value-creation opportunities we may find. I expect that through it all, we will emerge with a champion spirit and prove that a rail platform is built to deliver, to deliver essential goods to society, to deliver innovative solutions, products, and world-class service to our customers, and also to deliver long-term value creation and returns to shareholders. I'll now turn the call over to Melendy Lovett to talk through our operational and financial remarks in more detail, before closing with my final point on our go-forward business assumption.

Thank you, Jean, and good morning, everyone. Our first quarter results reflect the commitment and execution on a number of actions taken to align the company's organization with our go-forward rail strategy and to improve business performance. While we recognize the current environment will make accomplishing our financial priorities more challenging, we have not lost sight of our longer-term goals. Our primary objectives as a leadership team are to protect the health and safety of our employees and to ensure business continuity and capital preservation. Fortunately, the steps we were taking to optimize the company's cost structure were timely and advantageous given actions needed amid the COVID-19 crisis. During the company's fourth quarter earnings call, we announced a target reduction of $25 million to $30 million in administrative costs across the organization. In the first quarter, the company took action on savings totaling $9 million to $10 million which included employee reductions and the consolidation of our logistics and equipment services businesses into the operations of the Rail Products Group. It also included the decision to relocate our corporate campus to a more cost-effective location and the disposition of a non-operational facility. These actions resulted in a restructuring charge of approximately $5.5 million. Additionally, management has identified savings of $15 million to $20 million that we expect to take action on during the next few quarters as we realign our organization and streamline administrative support costs. When combined with the cost-saving actions taken throughout 2019, total reductions in SE&A and other administrative costs are nearing $60 million. We're committed to accelerating the performance of the platform through effective and efficient alignment of our organization and we will provide updates on our cost optimization progress throughout the year. Another key priority for the company has been the optimization of our balance sheet through the leveraging of our lease fleet to lower our cost of capital. As part of this process, we identified the early redemption of our 2006 securitization TRL V as an optimization opportunity. This securitization had a remaining principal balance of approximately $105 million and a coupon of 5.9%. The net book value of these assets at the time of redemption was approximately $303 million. These railcars are now available to be monetized through recapitalization of the assets or through secondary market transactions. With this redemption, the weighted average coupon rate on our wholly-owned leasing debt was just under 4% at quarter-end. The company also purchased approximately 1.9 million shares for $35.4 million in the weeks following our fourth quarter conference call. As of the end of the first quarter, the company has approximately $90 million remaining under our current amended authorization. Trinity's management has served together and collaborated very closely in setting the strategic priorities for the company as a rail-focused organization. It's been my honor to serve as Trinity CFO over the last year and to get to know many of our shareholders and potential investors. I have great confidence that we're aligning our leadership and organization to better serve our customers and our stakeholders and to accelerate Trinity's performance to unlock shareholder value once we emerge from the Coronavirus pandemic. Eric has been a key leader in this company and the rail industry throughout his career. This has been a seamless transition for our team and for our business leaders, and he will be a familiar face to our investors as well. I'll now turn the call over to Eric to discuss more detail of our financial performance.

Thank you, Melendy, and good morning, everyone. I'm honored to be assuming the CFO position after 25 years of service to the company. I look forward to working with our stakeholders in this role, as we continue to improve upon both the effectiveness and efficiency of our platform and to drive enhanced performance and value-creation opportunities. With the onset of the COVID-19 outbreak, we've implemented preventative measures without significant interruptions thus far to our daily operations. However, we expect that there will be negative financial impact to our business, and we will adjust accordingly. While there were a number of moving pieces in the first quarter within Trinity's corporate line items, and consolidated results, the operational performance of the railcar leasing and products businesses were slightly better than our internal expectations. The Leasing Group's revenue and profit from operations grew year-over-year primarily due to growth in the lease fleet and higher average lease rates. The change to our depreciation policy also contributed to the increase in the segment profit margin. During the first quarter, we completed a small portfolio sale to one of our ROE partners demonstrating the value of railcar assets with leases attached, even in a state of heightened financial market disruptions. Rail Products Group delivered just over 3,700 railcars in the first quarter, while reducing production capacity within our manufacturing facilities. As I mentioned on our February earnings call, we expected these margin headwinds from the inefficiencies in slowing our production and reducing our manufacturing capacity and headcount. Commercially, we were impacted by the evolving uncertainty within the industrial market and lower North American railcar loadings. Lease fleet utilization declined to 95.4% and new railcar orders for the quarter totaled 1,970 railcars. By our analysis, we believe approximately 80% of our customers operate as essential businesses and infrastructure as defined by governmental authorities and many of our other customers indirectly support these businesses within the supply chain. Given the prevalence of public data on railcar loadings which is a primary indicator for our business, the shift in demand environment for railcar equipment did not come as a surprise. We've seen significant declines in rail volumes, which ultimately lead to underutilized railcar equipment. However, there are a few market sectors that present as a bright spot for rail equipment demand. The best near-term opportunity, we believe, will be in agricultural markets, specific to grains and fertilizers, due to the age of the fleet of railcars and relatively high asset utilization. There is not one railcar market. There are several markets of railcars, each one specific to their own demand drivers and fleet dynamics. We're closely monitoring economic forecasts for recovery in all of our markets. Regardless of the market trajectory, our management team is experienced in responding to rapid shifts in railcar demand. Compounding the issues surrounding COVID-19, the drastic decline in crude oil prices in the first quarter has created a historic jolt to the energy markets. In response, we removed approximately 540 tank cars from our first quarter backlog. They are expected to go primarily into crude service because the customers' financial condition had changed materially since the orders were made. Our backlog no longer includes any railcars for frac sand service or crude oil service. With that said, in Trinity's Lease portfolio, approximately 4% currently serves the crude oil market, and approximately 8% serves the frac sand market. These markets have experienced numerous structural shifts over the past decade, and the challenges spurred by the mining of brown sand in the last few years are widely acknowledged. We expect the collapse in shale oil production could lead the frac sand industry financially vulnerable. And we're closely and continually monitoring market developments to mitigate our risk and protect the return on this investment. A small percentage of our customers have also requested financial relief in the current environment. Where appropriate, Trinity has implemented certain criteria for extending payment terms for customers at this time. And we'll continue to evaluate how we can support our customers. As it pertains to Trinity's financial position, we believe Trinity is starting from a position of strength. Following the rapid deterioration of the financial markets due to COVID-19, the company tested several scenario analyses on our cash flows to evaluate the strength of our balance sheet and liquidity. Through all of our assumptions, Trinity's platform was resilient. A summary of our liquidity and balance sheet is provided on Slide 4 of the supplemental materials. As of the end of the first quarter, the company had committed available liquidity of $760 million. In addition, we expect to receive $300 million in tax refunds this year resulting from reinstatement of tax loss carryback provisions in the CARES Act. The cash tax benefit reflects the significant financial synergies within our platform. We have a diverse lease fleet of approximately 130,000 railcars, providing lease and fee income visibility, which includes total committed revenue of $2.5 billion as well as a railcar backlog with a value of $1.6 billion. When considering the relative market stability to date from our highway and maintenance businesses, we expect Trinity to generate solid cash flow in 2020, and to maintain our liquidity position and our base case scenario. As further liquidity options, the company has unencumbered assets of approximately $1.5 billion available for monetization through leverage or secondary market transactions. When considering the company's debt maturity profile and the additional levers we have to unlock capital, we believe our balance sheet and financial strength enables Trinity to navigate the COVID-19 pandemic. We will continue to maximize the cash flow from the committed business while using our commercial reach and market knowledge to navigate these unusual times. As a result of our shifting priorities to manage our balance sheet amid COVID-19, we anticipate the company's leverage ratios may decline as we go through the year. We're closely monitoring our available capital and liquidity needs to determine our course of action and to balance our long-term goal of balance sheet optimization. Our platform is demonstrating that it is built to deliver and sustain. I'll now turn the call back over to Jean for closing comments.

Thank you, Eric. As you can see from our first quarter performance, Trinity is taking steps to align our cost structure to our current demand environment. We're doing this amid a challenging market environment and in accordance with our longer-term plan to accelerate Trinity's performance through the cycle. Given the limited visibility in the market stemming from the Coronavirus, we're not providing financial guidance at this time. Like numerous other companies have stated, we cannot predict at this time the impact or duration of COVID-19 and the collapse in energy prices on our business or the impact to our customers and suppliers' businesses. We're highly focused on scenario analysis, business continuity, and contingency planning and preserving and bolstering our liquidity position. Fortunately, Trinity has long-duration lease contracts that protect against market disruption and a solid backlog in which we can flex our capacity to right size for demand. We hope to put forth a broader framework for Trinity's strategic roadmap on our third-quarter call in October. However, for the time being, we thought it would be helpful to give you some context behind the scenario analysis we performed on the financial position and condition as a company as guideposts. Slide 5 of the supplemental materials provides a summary of the inputs to this analysis. These scenarios also provide a framework to guide our capital allocation decisions in the current market environment. The base case scenario assumes the economy reopens in the near-term and railcar loadings begin to improve sometime in or around the third quarter. In this type of environment, we would expect that our lease fleet utilization remains approximately 95%, as our backlog delivers that we transact a modest amount of leased railcar portfolio sales and achieve our SE&A optimization target. In our stress case scenario, if COVID-19 continues to restrict the recovery of the market, we have modeled the potential for deferrals of our backlog, utilization to drop below 90%, and the inability to transact railcar sales in the secondary market. In either scenario, we expect the financial synergies of the rail platform to yield positive operating cash flows. The closer our financial performance resembles our stress case scenario, our capital allocation framework will shift towards preservation. The more our performance reflects our base case scenario, our capital allocation will enable continued and prudent investment in the business. Today's Trinity's current plans for manufacturing and corporate CapEx is fairly committed in 2020 due to construction in progress for new maintenance facilities required to service our growing lease fleet. This spend is estimated to be approximately $100 million for the year. However, historically manufacturing CapEx for the rail business has ranged from $5 million to $20 million per year in downturns, proving our ability to pull in the spend significantly, if necessary. As a result of railcars in our backlog leasing customers, and the potential for lower secondary market sales in our various scenarios, we believe the range of net lease fleet investment could be between $350 million to $500 million in 2020 in either of these scenarios. While combating the economic ramifications for COVID-19 will be a major feat, Trinity has historically maintained its dividends. Again, in either scenario as shown our confidence in the cash generation of Trinity's platforms supports our commitment to shareholder returns. Today, the company will pay out our 224th consecutive quarterly dividend. Management and the board of directors are aligned in our expectation that the synergies of the rail platform enable meaningful reinvestment in the business, while continuing to support substantial returns of capital to shareholders. In the time I've spent my first few months as Trinity's CEO, I could not be more proud of the team we have in place, from our welders on the shop floor, to the dedicated men and women that service our customers and business stakeholders, to the experienced leadership team and support of our board. We are continuing to align our organization and operations to maximize our performance. Slide 6 in the supplemental material recaps our key financial and operational goals. The Coronavirus has created a challenging hurdle to overcome in pursuit of our longer-term goals. That being said, and regardless of the point in the cycle we find ourselves in, the synergies of the rail platform and the cash flow generation are the driving engine behind Trinity's value creation for shareholders. Our platform is built to deliver and we believe we are in a position to withstand the current market environment and deliver long-term value to our shareholders. Operator, we will now take questions from our listeners.

We'll take our first question from Allison Poliniak with Wells Fargo. Please go ahead. Your line is open.

Hi guys, thanks for taking my question and congrats Eric on the appointment, well deserved. Just want to go back to the commentary around lease rates; they were pretty favorable for Q1. Was there something unique to those cars and maybe can you talk through how things are trending as you know this, I guess pandemic accelerates here in the U.S.?

Thank you, Allison. This is Eric, I'll take that. So I would say that the increase in our lease rates was the average lease rates in our portfolio that is more impacted by the ins and outs of our portfolio in terms of what we added to the fleet and what we sold to the fleet. In terms of absolute lease rates, we're like we said in our last call, we are still seeing headwinds on lease rates and with railcar loadings trending this way they are, I'd expect that trend to continue in the near-term.

Understood and secondary market, you've been pretty active selling into it. It seems obviously just given the concerns from the macro side that dynamic could be switching. Any color there or could you seek some consolidation even among the smaller players here, any thoughts on that?

Sure. This is Eric again. In the first quarter, we sold about $110 million worth of railcars, particularly in March, which was a peak time of uncertainty, especially due to volatility in the equity market. I was pleased that we managed to execute well. Moving forward, as Jean mentioned, in some of our stress scenarios, we have considered the ability to transact even if the market isn't favorable for sellers. This might shift to a buyer's market, and I'm uncertain about the market clearing prices needed for portfolio sales. While I don't anticipate seeing distressed portfolios in the near term, that could change if the situation drags on.

Great. And then just one last question from me, just want to understand your philosophy between utilization and better lease rates. Obviously, we'd like both, but in this kind of scenario, what is Trinity focusing on? Are you focused more on utilization or lease rates, how are you balancing that here?

Yes, this is Eric again. I would say right now we're focusing more on utilization. Even though our utilization is decreasing, we are concentrating on utilization based on the railcar needs of our customers. If a customer doesn't require the cars, it might not be possible to maintain a favorable rate. We are still renewing railcars and plan to continue renewing railcars on expiring leases this year. However, we anticipate facing some rate challenges moving forward.

We'll take our next question from Justin Long with Stephens. Please go ahead. Your line is open.

Thanks for taking my questions. I wanted to start with one on return but totally understand 2020 guidance being withdrawn but you did have this three-year ROE target for 11% to 13%. I was wondering if you could provide an update on that target and the timing of that target. As we think about the assumptions that you have embedded in getting to that 11% to 13%, do we need to see a return to normalized lease rates and normalized build rates to get there, or are there enough levers that you can pull that are company-specific to hit that target, even in a below replacement market?

This is Jean. Thanks for the question, Justin. While the current environment will make achieving our long-term targets in the original timeframe extremely challenging, we're still committed to achieving these targets in due course. I would expect, with the uncertainty in the market right now, it'll take us a little bit longer to decide if we have levers that could keep that on track, but I think the headwinds will push that out a little.

Okay. And on the headcount savings that you called out of $9 million to $10 million, is that number included within SE&A cost savings target of $25 million to $30 million and maybe as you think about this downturn and the stress case that you mentioned, is there a way to think about the incremental costs you could take out in that scenario beyond what you've outlined that $25 million to $30 million?

Hello, Justin, it's Melendy. Yes, the $9 million to $10 million that I mentioned in my prepared remarks is included in the $25 million to $30 million goal that we announced in the fourth quarter. And as I said in my prepared remarks, we have identified and plan to complete that $25 million to $30 million goal this year. As we laid out in the stress case, if we see further contraction, if we see the COVID-19 situation extended, we're prepared to make further reductions.

Okay. Maybe just one last quick one on the guidance for operating cash flow to be positive this year, could you talk about the change in working capital that's assumed within that guidance? And does that also include the $300 million tax benefit you mentioned?

Hey Justin, this is Eric. I'm not going to provide specific guidance on working capital. However, regarding operating cash flow, as our production volumes decrease, we expect some natural working capital gains throughout the year due to our declining run rates, which is typical and has occurred in previous cycles. The refund mentioned will be part of our operating cash flow. As we've discussed before, we anticipate having positive operating cash flow for the year even without the CARES Act. We're prioritizing liquidity and plan to maintain it throughout the year, with measures in place to ensure we can achieve that.

And as I mentioned in my remarks, we're going to right now have $350 million to $500 million in potential new lease fleet additions, $100 million in manufacturing CapEx, and between $150 million and $200 million in shareholder returns through dividends and the share repurchases and we're still expecting to maintain our liquidity.

We'll take our next question from Gordon Johnson with GLJ Research. Please go ahead. Your line is open.

Hi everyone. This is James Bardowski standing in for Gordon. Thank you for taking my questions. I have a question regarding the utilization and balance sheet optimization program within the Leasing Group. The targeted leverage of 60% to 65% for your balance sheet optimization program seems to depend on both the size of your fleet and the anticipated size of your fleet in the future. Last quarter, I noted that utilization dropped to 95.4%. Although you mentioned that the impact on leasing customers has been minimal, you did recognize that loadings are weak and rates have been relatively lower. If we experience a slow recovery, more of an L-shaped recovery, and customers begin to cancel orders, how low could fleet utilization fall before you would take steps to manage your fleet and adjust your guidance on expected leverage related to future fleet growth?

Hey, Gordon, this is Eric. Let me try and James, I'm sorry, take that. I know when we look at the stress case and we modeled, in a stress case environment, we expected utilization there, we saw our utilization to get below 90%. And even within that, we thought the business performed well or performed adequately and through the cycle. In terms of would we start, I think that what you're asking is would we sell off assets in order to preserve leverage. Is that just?

Exactly.

Yes, that's definitely a strategy we can employ since we have a significant unencumbered lease fleet valued at $1.5 billion. We believe this provides us with considerable financial flexibility to either sell or finance assets to sustain or enhance liquidity. This approach isn't strictly focused on utilization.

Okay, that is very helpful. So there's basically not a set target where you would start to accelerate sales out of the lease fleet, if, let's say, it fell to 88%?

No, there's not. It will depend on the conditions in the secondary market. If there are chances to sell assets, that would be an option. However, if utilization dropped that much, we assume we wouldn't be able to sell many assets due to the market conditions. So that situation would work against that stressful scenario.

And then quickly turning to the rail fleet, I noticed that new orders fell again for the fifth straight quarter on a year-over-year level. And you didn't mention the cancellations now remove the crude oil aspect from your backlog, albeit you still have exposure through your utilized fleet currently. Now, is that to say that you basically you don't expect any cancellations going forward, or is there any other kind of shaky areas that we might expect to see an additional wave of cancellations? I know you mentioned agriculture is strong but is there any other sectors where you see potential growth offsetting that can maybe help your orders?

Sure, James, this is Eric again. I'd say longer-term and even this year, the biggest driver that's still going to drive new orders is going to be replacement demand. Replacement demand is the single largest driver for new railcar deliveries and new railcar orders. I don't expect that to go to zero as we've seen in other cycles, it does become a bit of a buying opportunity for customers with a longer-term view to buy assets at this part of the cycle, so I don't expect that to happen.

And we continue to get some orders even in the past week; we've received several hundred orders. So even in the midst of the challenges, customers still need some of these railcars.

Thank you, that is very helpful. I have one final question before I pass it along. You mentioned that one reason for the decrease in your margins in the Rail Group was related to inefficiencies. Historically, it appears your costs tend to lag. Given your decision to cut utilization, what expectations can you share regarding potential margin costs for the Rail Group, possibly for the second quarter?

James, we're not doing any forward margin guidance. We hope to give that in our next quarter call should things stabilize.

Okay, that's helpful. Actually and then real quick, if you could, how many of the railcar orders in the first quarter, how many were for the Leasing Group?

Roughly, about half, a little more than half of the orders were for leasing.

Little more than that, all right. Thank you very much. Appreciate the time.

Thank you for the interest.

We'll take our next question from Matt Elkott with Cowen. Please go ahead. Your line is open.

Good morning. Thank you. I have an industry question first. I think maybe Eric this is for you. There's a big number of cars idle right now and we know some information about the types but not the subtypes. Do you have a sense of what percentage roughly of that idle supply of railcars is never going to come back even if no matter how much demand comes back, meaning they may be dated DOT 11 tank cars that are just not going to be able to be used in anything and are just waiting for the right scrap price to be taken out of the idle population?

Matt, this is Eric. Put me on the spot for giving opinion, right. There's not great data on that. But we've done research within our fleet and some other things that we've looked at and the railcars and storage numbers as I've mentioned on previous calls can be a little bit deceiving. But the trend line is I think what's more important. If we had to put a number on kind of that long-term storage and I'd define long-term storage as if it hasn't been used in a year or longer then I would kind of deem that as surplus or destined to scrap. I would put that number in the 70,000 to 90,000 railcar bucket. I think the principal car types that make that up are going to be some of the higher mount boxcars and some older covered hoppers and then some of the old coal cars. I hope that helps. But that's my opinion.

Yes, you can work with those numbers. Thank you for your thoughts. It may be self-explanatory since it's referred to as the base case scenario, but I want to confirm that the base case scenario you are presenting is what you believe is the most likely outcome based on your current knowledge.

So, Matt, this is, Jean. I just want to say some of those guardrails; we've run many, many scenarios. We wanted to give you confidence that we've looked at what levers we have to pull based off the changing environment. But until the industry stabilizes, and we know what's going to occur, we can't in any effect give you guidance on what we think is or is not going to happen there.

Got it. And then did you guys say what percentage of your current backlog which I think is 30,000 cars is for delivery this year?

We did not. But it will be in our Q and it's about 10,000 railcars are scheduled for delivery this year.

And based on the base case scenario, there's no risk to that number you think?

Under our base case scenario, as we said, that delivers in our base case.

Okay, got it. And also Eric, I think you provided some utilization numbers regarding the lease fleet for crude and frac; I believe 4% of your lease is crude and 8% is frac of the lease fleet?

That was not a utilization number; that was the last service of our fleet, that's the last service.

Okay. So it's not 4% of the utilized fleet?

It is 4% of our total fleet. And that's a good question actually because

What's your amortization on those cars?

Our entire fleet has been evaluated. If a car was previously used for crude and is now idle, it is classified as a crude car. Similarly, if it was used for frac sand and is currently idle, it is classified as a frac sand car. We are not providing utilization statistics by individual car types, but 8% of our fleet last carried frac sand, while 4% last carried crude.

Okay. So the actual percentages of the utilized fleet are meaningfully lower than 4% and 8%?

I think I understood that. I think the answer, I'm not sure I follow the math on that.

Yes, I mean, yes, I think your fleet realization is 95%?

95% right.

Of that population that's utilized, if the percentage that's crude and frac is lower than the 4% and 8% you gave?

The number of cars is correct.

Got it, got it. That makes sense. And just one last question. Can you give us any underlying assumptions for the stress case scenario that you're using macro assumptions?

We were looking at really the railcar loading not to start come back into the second half of 2021. So it was a later recovery of the overall industry.

We'll take our next question from Bascome Majors with Susquehanna. Please go ahead. Your line is open.

Thank you. On production, I understand the unwillingness or caution around guiding anything. But, I mean, you took production rates down 50% or close to it in a single quarter, could you share with us what the runway on a weekly or biweekly or monthly basis what's actually in a quarter, so we can kind of get a sense of how things are moving right now before any further adjustments?

So on manufacturing, we took in the quarter, so from the end of last year through the first quarter we had a reduction of 30%, so just want to make sure that was clear in the headcount.

Headcount, production headcount.

Yes, I was asking about the production rate and delivery rates?

Okay.

Yes, Bascome, I apologize, but we won't provide details on the run rates for competitive and guidance reasons. However, we did take action throughout the quarter. Many of the steps we implemented in the first quarter were not specifically related to COVID-19. We mentioned in our February call that we expected our production to decrease. Therefore, if there are further declines linked to COVID, that would affect that number.

And are you running all three of your primary production locations below capacity? Or is there an opportunity to consolidate some of that in a weaker market?

If you look back over the years, we've consolidated many of our manufacturing assets. We are currently operating three major facilities for production. We will continue to explore ways to optimize that, depending on whether we want to operate one, two, or three facilities. Jean, do you have anything to add?

No.

Thank you. And a couple on leasing, then I'll pass it on. Is the Rail ABS market open today? Should you want to access that? And do you have any sense of the kind of coupon rates in collateral advanced rates that we might see?

Bascome, this is Eric again. I believe that when the time comes for us to access the ABS market, we will be successful in accessing it. I think spreads will be a little bit higher than the last year we did. But with the overall benchmarks low, I think the coupon will likely be higher than what we achieved previously. But it kind of depends on when we do access to markets, but I believe they'll be open.

Do you I mean advance rates, I think you've historically been in your last few deals in the high 70s. Do you think there's any give on that as well?

It depends; that's possible. It's always a trade-off. A lot of times you have flexibility in all of the markets regarding how much you want to push the advance rate, whether you use different assets or choose to tranche. If you go for a single transaction or single tranche transaction, the advance rate may be a bit lower. But that's a bit technical in terms of securitizations. I would expect it to be similar to previous years.

And last one from me, the crude and sand exposures. I appreciate you disclosing that, if we could get it up to 12% of the car count in your fleet. Would that number be meaningfully different if we were to size it up as a percent of book value or maybe a percent of current or committed revenue? And maybe to book in that, are the customer conversations that you're hearing where they're requesting financial relief or payment deferrals, are those coming from these end markets or is that more broad? Thank you.

Okay, great. This is Eric, I'll take that. When you look at the unit count from a book value perspective, it’s going to be pretty close to 12% when you total them up, and on average, it will come out about that number. Regarding the revenue, the frac sand cars accounted for about 4% of our revenue in the first quarter. As for your question about lessee discussions, those are included in that number, but we're receiving requests from a broader market beyond just frac sand and energy. Many customers across various industries are affected, and we are engaging with many of our other customers.

We'll take our next question from Steve Barger with KeyBanc Capital Markets. Please go ahead. Your line is open.

Good morning everybody or good afternoon. I know you don't want to get into guidance. But if current conditions are basically what we get for a while, will the next few quarters just look like 1Q in terms of deliveries and consolidated operating margin or directionally how should we think about the second half versus the first half, just based on what you can see now?

I would expect that the second quarter will be more challenged than we were in the first quarter based off of the environment that we're operating in currently.

Okay. And just as you think about the back half or is any color there?

So again, we do have the base case and stress case. And remember in the stress case, I said we were looking for the rail loadings to start to recover to the second half of 2021. So I would refer back to that stress case on what we might expect.

Yes, we really appreciate you providing that base and stress case. I guess just as you think about that stress case, if that were to play out, just in terms of a range, does operating margins stay high single-digit, or does it fall to the mid-single-digit, any just broad kind of expectations?

Yes, we’re not providing guidance at this moment, so I won’t comment on that right now. We aim to offer more guidance information in the second quarter in July.

Got it. And just one more then, I get that mix in production runs matter but just rough math, what is the minimum railcar production level you need to stay to break-even, to stay break-even in the Rail Group?

Steve, this is Eric. The breakeven analysis will vary based on the smoothness of the production cycle. A smoother cycle can lead to lower break-even points, while increased volatility will raise them. As I noted before, our platform today is different from 2009 and 2010 because we're operating with fewer facilities and have a more variable cost structure. This should contribute to a lower break-even point. However, since conditions are not always the same, pinpointing an exact break-even point is challenging.

And there are no further questions on the line at this time. I'll turn the program back to Jessica Greiner.

Thank you, David. That concludes today's conference call. A replay of today's call will be available after 1 o'clock Eastern Standard Time through midnight on May 7, 2020. The access number is (402) 220-1111. A replay of the webcast will also be available under the Events & Presentations page on our Investor Relations website. We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.

This does conclude today's program. Thank you for your participation. And you may now disconnect.