Good day, and welcome to the Trinity Industries Third Quarter and 9 months ended September 30, 2023 Results Conference Call. Please note this event is being recorded. 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 include 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 any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. I would now like to turn the conference over to Leigh Mann, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. We appreciate you joining us for the company's Third quarter 2023 Financial Results Conference Call. Our prepared remarks will include comments from Jean Savage, Trinity's Chief Executive Officer and President; and Eric Marchetto, the company's Chief Financial Officer. We will hold a Q&A session following the prepared remarks from our leaders. During the call today, we will reference slides highlighting key points of discussion and certain non-GAAP financial metrics. The reconciliations of the non-GAAP metrics to comparable GAAP measures are provided in the appendix of the supplemental slides, which are accessible on our Investor Relations website at www.trin.net. These slides are under the Events and Presentations portion of the website, along with the third quarter earnings conference call. A replay of today's call will be available after 10:30 a.m. Eastern Time through midnight on November 7, 2023. Replay information is available under the Events and Presentations page on our Investor Relations website. It is now my pleasure to turn the call over to Jean.

Thank you, Leigh, and good morning, everyone. I'll start my prepared comments on Slide 3 with key messages we want to convey during this morning's call. Trinity's third quarter results reflect significantly stronger performance with revenue growth of 65% compared to a year ago. We believe we are on a good path to end 2023 with favorable financial performance and continued improvement. In the quarter, we continued to experience strength in our leasing segment, with fleet utilization of 98.1% and have confidence that lease rates will continue to rise given that our future lease rate differential (FLRD) of 26.6% and continuing favorable railcar supply fundamentals. As previously disclosed, border closures and congestion resulted in a 14% lower than forecasted delivery rate in the quarter with 4,325 deliveries. We will discuss the fourth quarter later in our prepared remarks, but we are lowering our 2023 adjusted EPS guidance to $1.20 to $1.35 to account for the deliveries loss due to these border issues and other related supply chain and efficiency impacts. Please turn to Slide 4 for a market update and commercial overview. Starting with the top left graph, overall rail traffic is improving. As you will recall, intermodal volumes are the most significant headwind to rail traffic this year, but volumes have improved in recent weeks. Carload volumes remained up year-over-year as solid performance from motor vehicles, minerals, petroleum products, and farm products offset declines in grain volumes. The industry population of railcars and storage has been shrinking due to improved utilization of covered hoppers, mostly for grain shipments this harvest season. Moving to the bottom half of the slide, as I mentioned, our FLRD and utilization rates remained favorable in the quarter. Our FLRD of 26.6% shows our ability to continue to push rates upward while maintaining a high fleet utilization, 98.1% in the third quarter. On the bottom right, the border closure and congestion impacted deliveries in the quarter. Orders and inquiries support replacement level demand consistent with our expectations over the next few years. Now let's turn to Slide 5 and talk about financial results in the quarter. Revenue of $821 million is up 65% year-over-year driven by a higher volume of external deliveries in the quarter. We earned an adjusted EPS of $0.26. As a reminder, in the third quarter of 2022, we completed a large railcar sale, which benefited EPS last year. Lease portfolio sale gains for the third quarter of 2023 were modest, but we are still targeting the fourth quarter for more meaningful railcar sales in 2023 and to achieve our net fleet investment target. Cash flow from continuing operations was $76 million in the quarter, and our adjusted free cash flow was a negative $31 million. Eric will talk more about cash a little later in our prepared remarks. Please turn with me to Slide 6 to talk about our segments, starting with leasing. Leasing revenue was $223 million in the quarter, up 14% year-over-year, driven by improved lease rates, higher utilization, and acquisition-related revenues included in the current year period. Renewal lease rates in the quarter were 32.5% above expiry rates on average, trending closely to the FLRD. Thanks to favorable market conditions, we have delivered a double-digit FLRD for 6 consecutive quarters, and we are seeing a noticeable impact as over 30% of our fleet reflects the current robust lease rate environment. To preserve these lease rates, we continue to push churn with average renewal lease term of 55 months year-to-date. Even with the strong lease rate environment, our renewal success rate in the quarter was 86%, well above average and evidence that lessors still have significant pricing power. Leasing and Management operating margin was 38.4%. This is slightly up year-over-year with improved lease rates, partially offset by increased maintenance expense, depreciation expense, and the margin profile of acquisitions in the segment. Leasing maintenance is elevated primarily due to 2 ongoing industry trends. First, more change in service modifications to position railcars for their best opportunities; and second, more scheduled compliance activity in the tank car fleet. Moving to Rail Products, I want to touch on the border issues in the quarter briefly. On September 20, the U.S. Customs and Border Protection Agency suspended U.S.-bound cross-border rail traffic in Eagle Pass, Texas, the primary border crossing we use for railcar deliveries from our manufacturing facilities in Mexico. This action was taken to assist the U.S. Border Patrol due to the influx of migrants at the border. While rail traffic operations resumed on September 23, congestion and rail traffic challenges continue to evolve. The third quarter impact was 685 fewer railcars delivered than expected. While we have started moving railcars again, we still have railcars temporarily sitting in storage and at our facilities, and we continue to evaluate available alternatives for rail and truck transportation between Mexico and the United States. We do not anticipate completing all of these deliveries before the end of the year. While deliveries in the quarter were lower than expected, they trended heavily toward external sales, which benefited the consolidated financials in the quarter. Additionally, despite the efficiency loss due to the border challenges, we saw operating margin improvement sequentially and year-over-year to 5.7%. In the quarter, the segment results include a gain from insurance recoveries. Excluding those gains, the segment margin is 5.2%, reflecting meaningful labor and efficiency improvements. In the quarter, the peso remained strong at an average exchange rate of 17.07, but we were able to mitigate further risk with our hedging program. We expect to exit the year with a segment operating margin in rail products of 8% to 9% and the full year average of 5% to 6%, barring further substantial rail service issues at the border. Additional congestion or closures will negatively impact our ability to get railcars across the border and may require us to slow down or temporarily suspend production. We are working with the railroads and government agencies to do what we can to keep operations running smoothly for both inbound and outbound rail and trust track. The value of our new railcar backlog is $3.6 billion, and we have another $124 million related to sustainable railcar conversions giving us production visibility into 2024 and beyond. Turn with me to Slide 7. I'll highlight a few more key accomplishments in the quarter. Our loan value is currently 64.9%, which we view favorably. Year-to-date, our net investment in our lease fleet is $238 million and our pretax ROE for the last 12 months is 9.6%. And before I turn the call to Eric, I want to highlight one of our sustainability accomplishments. As of September of this year, Trinity received a rating of AA in the MSCI ESG rating assessment. This rating demonstrates both our steady progress over the past 4 years and an acknowledgment of our ability to manage ESG risk relative to our peers. Nowhere is this stronger than the emphasis on employee safety where our ISO 45001 certified program drives continuous improvement, improvement that is reflected in our safety incident rates. Congratulations to our team on this accomplishment. Safety is a core value at Trinity and our AA rating shows the industry's recognition of our efforts. And now I'll turn the call to Eric to review the financial statements and talk about the fourth quarter.

Good morning, everyone. I'll start my comments on Slide 8 with the discussion of the income and cash flow statements. Total revenues of $821 million in the quarter reflected higher external railcar deliveries and improved lease rates. Our GAAP earnings per share were $0.29. After adjusting out the $3.7 million of insurance recoveries during the quarter, our adjusted EPS was $0.26. It's worth noting that gains from the lease portfolio sales were $3 million in the quarter. As I said last quarter, we expect to see higher gains in the fourth quarter of the year. Moving to the cash flow statement. Year-to-date cash flow from continued operations is $216 million. Adjusted free cash flow is $50 million after investments and dividends. As Jean mentioned, adjusted free cash flow in the third quarter was a negative $31 million. This was predominantly driven by modest railcar sales in the quarter as well as net repayments of debt. Earlier this week, we paid our 238th consecutive dividend which is a meaningful source of capital returns for our shareholders. On Slide 9, our liquidity of $780 million reflects our cash, revolver, and warehouse positions. Because of the border closure and congestion, we ended the quarter with higher inventory levels driven by railcar citizens finished goods and higher work in process due to other supply chain challenges. And now let's turn to Slide 10 and talk about the final 3 months of 2023. We continue to expect industry deliveries of approximately 45,000 railcars, which implies fourth quarter deliveries relatively consistent with the third quarter. We expect net fleet investment of $250 million to $350 million in 2023 and expect to end the 3-year planning period within our target range of $500 million to $600 million. Year-to-date, investment is $238 million, and in the fourth quarter, we expect a more traditional mix of internal and external deliveries. We expect manufacturing and general CapEx of $40 million to $50 million. We have invested $29 million year-to-date. We expect a similar run rate for the fourth quarter to what we have realized this year. And as Jean mentioned at the top of the call, we are lowering our 2023 EPS guidance to a range of $1.20 to $1.35 to account for the loss deliveries in the third quarter as well as related supply chain and efficiency challenges resulting from the border closure and congestion. This target represents significant growth in the fourth quarter and is dependent on continuing strength in our leasing results, a large lease portfolio sale, and improved revenue and margins in the Rail Products segment. We are working hard to get as many deliveries across the board as quickly and efficiently as possible. But any further congestion or closures would negatively impact our results in the fourth quarter. And finally, in the third quarter of 2022, we set a revised 3-year cash flow from operations target of $1.2 billion to $1.4 billion for the 3-year period 2021 through 2023 to account for changes in our operating environment. While we continue to see improvement, we are revising this cash flow target to a range of $1 billion to $1.2 billion. This reflects continued elevated working capital due to border issues, supply chain challenges, and lower efficiency and margins than expected in the first half of 2023. It is worth noting that railcar sales are not reflected in cash from operations, but are a significant source of cash for Trinity. I'm proud of the hard work of our team in navigating through the border change. I'm confident that barring any further disruption, we can end the year with strong financial results, solid operations and the ability to take advantage of the significant operating leverage of our business. We look forward to sharing those results with you in 2024. And now, operator, we are ready for our first question.

The first question today comes from Allison Poliniak with Wells Fargo.

First, I just want to talk to leasing. The maintenance side, I know you talked about it being still elevated. Is there a way to understand sequentially? Has it stabilized? What's your thoughts on how that kind of trends as we start to move into '24? Just any color there.

Thanks, Allison, for the question. For the last several years, we've discussed the heightened level of tank car appliance events that are going to be required due to the strong build years of 2013 through 2015, when the industry built over 100,000 new tank cars. Now I want to emphasize, this is not HM-251 modification work. Here, we're just talking about the required 10-year compliance for all tank cars, and we're in the midst of that right now.

Okay. So we obviously expect it still to go into '24 based on the numbers that were built in those years then.

Yes.

Okay. And then just manufacturing, challenges have persisted in Mexico. Could you maybe talk about your manufacturing flexibility? I mean, can some of that production back into North America or into the U.S.? Or the costs still don't really offset that? And just any thoughts around that.

Okay. So we do manufacture some new cars in the U.S. in Texas, and we continue to do that. The cars that are being built in Mexico right now, really from a cost standpoint of being competitive in the industry, it would be impossible to bring all of those back to handle that. But we're really confident in our Mexico team and it's unusual to have these border issues. We put in place some things to mitigate issues in the future regarding bringing materials across the border into Mexico for assembly. We have different routes and different entry points that we can now use to get that product in. Then we're examining how we might bring these railcars back into the U.S. through different entry points. So we are looking at how we might mitigate this in the future so we don't have the same effect that we had in the third quarter.

The next question comes from Justin Long with Stephens.

Jean, I think at one point, you said Rail Products margins would be at an exit rate of 8% to 9%. I just wanted to clarify that that's what you expect for the full quarter in 4Q. And then is there any way to quantify the headwind that you saw from Eagle Pass as it relates to rail product margins in the quarter?

Well, thanks, Justin. When you look at the exit rate for the quarter, we do expect it to be 8% to 9%. And when you look at that, that's for the full quarter. Some of the headwinds, we're not breaking it down by basis points on the effect. But let me tell you what happens when they close the border. First, any of the cars that are already sitting there stay; any cars that were in route go and sit. So it takes a while for that congestion to alleviate. At our production rates right now, we're doing about 400 cars a week. When you look at that, we would shut down a plant very quickly if they're not taking cars off the plant property and into storage. So there was a lot of congestion that built up quickly in the third quarter. We started to see that dissipate through the first half of October and now see more normal operations occurring.

Okay. Got it. And I guess, secondly, and this one's probably for Eric. We've seen a lot of volatility in railcar sales. If you go back to the second quarter, the operating income impact was around $30 million. That came down to $3 million in the third quarter. I know you've got a big lease portfolio for sale in the fourth quarter. But is there any additional color you can give us in terms of the range of expectations for the impact from that in 4Q?

Justin, thank you. You are correct. There is some variability in the earnings. As mentioned last quarter, we indicated that our railcar sales would occur in the fourth quarter. We recorded only modest sales in the third quarter. To meet the guidance, there is indeed a sales figure included. We discussed this in relation to the net fleet investment and eliminations returning to a more typical level. Therefore, we will see car sales at increased levels, but nothing beyond what we have previously experienced.

Okay. So would you expect to be closer to the 2Q number?

As I mentioned, they will be larger, but it's not anything new to us.

The next question comes from Bascome Majors with Susquehanna.

Good morning. As we look into next year and think about the lease rate momentum that you clearly have and from the FLRD at 27% and the go-forward nature of that metric should continue to have. Is there anything unique about the number of expiring cars this year versus next or maybe a mix issue that's not captured by FLRD? Just anything you can help directionally for us to think about how much lease momentum you have into next year from this based on where conditions are today.

Thanks, Bascome. Well, we're not giving guidance for next year until our Q4 call, which will happen in February. But I will say that on a typical year, we see a fifth to a sixth of our fleet that expires and has to renew, with no real changes that we're looking at there. The FLRD at 26.6% foreshadows strong lease rate improvements over the next 4 quarters.

And to go back to Justin's question maybe in another way. I mean, for businesses like yours, there's a tendency for people like us to just run rate what you've done in the most recent quarter when there's not a ton of seasonality and understanding that the $0.70, $0.75 you've implied for the fourth quarter is helped by gains that were much larger than a couple of quarters this year. But outside of the gains number, is there anything else that we should think about being unusual for the fourth quarter pace when we think about go forward for the business and certainly, directionally, not necessarily quantitatively here.

Sure. So when you look at where Trinity stood at the end of the third quarter, we had about 50% of the industry backlog. So we have a good view into 2024 and beyond. Looking at the fourth quarter, we're seeing fewer changeovers. We've got better labor stabilization. So less turnover, and our employee tenure is increasing, which is helping us with our efficiency along with some volume in the quarter. We're seeing fewer supply chain disruptions and less headwind from the FX than we had anticipated. So all of those combined to give us confidence. The team has been ready. Unfortunately, in the third quarter, we had the headwinds that popped up and affected us. So we're set and ready to go in the fourth quarter.

So is it fair to characterize the fourth quarter as one where some of the things that have maybe been dragging you down below your potential that you've seen all along are going away rather than some unusual things leaning towards the positive?

That is fair to say, Bascome, thanks.

Last one, then I'll pass it on. You had talked about maybe doing a long-term investor update sometime in the fourth quarter or early next year. Could you update us on your thoughts there?

We've not set the date yet for that, Bascome, but I would expect it to be sometime next year.

Next question comes from Matt Elkott with TD Cowen.

It's good to see the FLRD remaining elevated and utilization ticking up a bit. Can you guys talk about the absolute market lease rates, how they moved sequentially in the third quarter? And if you think there is potential for more improvement? Or are we pretty much near peak as far as the absolute lease rates?

Thanks, Matt. Sorry about that. Year-over-year, our average lease rate for the consolidated fleet is up 8%, and you're starting to see that flow through in the top line on the revenue number. You combine that with the market conditions, which right now, we don't see changing in the FLRD of 26.6%. We still see room for the lessors to continue to raise the rates.

Okay. That's helpful, Jean. And then on the order side, 3,200 unit seems, I guess, it's a solid number, but it seems a bit light relative to the industry and also given how strong lease rates are and how tied some pockets of railcars are I'm just wondering what the order and inquiry activity for manufacturing is right now and if you've gotten orders after the third quarter?

So looking at inquiry levels, it's still supportive of our view of 40,000 to 50,000 car build for the industry, and we expect that over the next few years. Matt, you know that orders can be lumpy quarter-to-quarter. And we're sitting with 50% of the industry backlog. And so we think we have a pretty good view into what's going on. This year, we're on pace for 36,000 cars to come out of the industry. So attrition wise, we still expect that 40,000 to 50,000 cars to be built.

The next question comes from Steve Barger with KeyBanc Capital Markets.

This is actually Christian on for Steve Barger. First question, could you just give us a sense on your thoughts on what the normalized level of deliveries are just given the current demand environment and backlogs?

So the normalized level for deliveries, again, will match up with what we think the industry build will be, so 40,000 to 50,000 cars in a year. It can be lumpy quarter-to-quarter depending on what's going on and what the car types are. So you can divide it by 4 if you want, but it does change a little bit. So that probably is the best answer I have for you on that question.

Got it. And then just what percentage of your backlog is slated for 2024 production? How much for 2025 and what is beyond that?

So I think in the third quarter of last year, we got a large multiyear order from GATX. So our visibility is out for the next 5 years, at least for some of those orders. When you look at what we are going to deliver next year, about 40% of the backlog will deliver next year.

This concludes our question-and-answer session. I would like to turn the conference back over to Jean Savage for any closing remarks.

Well, thank you for joining us this morning. We're proud of the third quarter results and the improvement we're seeing in our business. We expect to close the year with solid momentum and strong financials. We look forward to sharing our progress with you then.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.