Earnings Call Transcript - TRN Q4 2022

Operator, Operator

Good day, and welcome to the Trinity Industries Fourth Quarter and 12 Months Ended December 31, 2022 Results Conference Call. All participants will be in listen-only mode today. After today’s presentation, there will be an opportunity to ask questions. Please note today’s 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 includes statements as to estimates, expectations, intentions and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain of the business issues and risks, a change in any of which would 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 Anne Mann, Vice President of Investor Relations. Please go ahead.

Leigh Anne Mann, Vice President of Investor Relations

Thank you, operator. Good morning, everyone. We appreciate you joining us for the company's fourth quarter 2022 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 as well as certain non-GAAP financial metrics. The reconciliation 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 can be found under the Events and Presentations portion of the website along with the fourth quarter earnings conference call event link. A replay of today's call will be available after 10:30 A.M. Eastern Time through midnight on February 28, 2023. Replay information is available under the Events & Presentations page on our Investor Relations website. It is now my pleasure to turn the call over to Jean.

Jean Savage, CEO

Thank you, Leigh, and good morning, everyone. I hope your 2023 is off to a great start. Before we begin with our prepared remarks, I want to take a moment and acknowledge the accomplishments of 2022, which don't always appear on financial statements but are essential to all of our stakeholders. Our company purpose is delivering goods for the good of all, and embedded in this purpose is our focus on environmental, social, and governance excellence. We have updated our operating model to embed sustainability as a core value, further evidence that we view sustainability as a key focus for our business. Last year, we continued our efforts to ramp up our ESG initiatives as a company. This included naming a Global Head of ESG for Trinity to spearhead and lead our ESG initiatives. We became the first railcar manufacturing company in North America to certify that our existing EHS management system conforms to the international organization for standardization, environmental standards and occupational health and safety standards. We hired a Director to lead our DE&I initiatives, launched nine employee resource groups and employee networks, and completed our first ESG roadshow with investors. Additionally, in our core business, we are consistently working on new product development to support sustainability priorities. This includes improving efficiency in new railcar designs and programs like our sustainable conversion program that allows us to repurpose existing railcars and increase the longevity of their parts and components. To date, our sustainable railcar conversion program has reused over 54 million pounds of steel. Our ESG initiatives are ongoing and I look forward to keeping you updated on our progress throughout the year. And now, turn with me to Slide 3 to talk about our key messages from today's call, which we will expand on later in our prepared remarks. Our fourth quarter GAAP EPS from continuing operations was $0.46 and adjusted EPS from continuing operations was $0.44, up $0.10 sequentially and $0.36 year-over-year. For the full year, GAAP EPS was $1.02 and adjusted EPS of $0.94 was up 176% over 2021. Given the unexpected labor, supply chain and rail service challenges we faced in 2022, which impacted our ability to deliver cars at the pace we expected, we are proud of what we accomplished and the growth we achieved in 2022. Furthermore, when we look ahead, we have reason to be optimistic. We ended the year with our future lease rate differential or FLRD at 25.1%. We view this as a good predictor of future rate growth in the leasing segment and the high FLRD is an indicator of continued broad-based strength in the railcar leasing market. The FLRD calculates the implied change in lease rates for railcar leases expiring over the next four quarters by applying the most recently transacted quarterly lease rates for each railcar type. The FLRD also accounts for current market rates, which remain strong despite uncertain economic sentiment. The key to remember is that industry supply has tightened and energy costs and supply chain planning have increased the importance of visibility and control in logistics planning for businesses. Trinity has a unique advantage as both a producer of railcars and a beneficiary of solid leasing fundamentals. The rest of the industry typically does one or the other, which can be challenging in periods of market volatility. We are introducing our 2023 EPS guidance of $1.50 to $1.70. At the midpoint, this represents EPS growth of 70% over 2022 and reflects higher deliveries, higher lease rates, and improved segment margins. Finally, in the fourth quarter, we completed our acquisition of Holden America, our second acquisition of 2022. Eric will discuss this acquisition and our general view on future acquisitions. Now, let’s turn to Slide 4 for a market update. While we continue to feel the impact of railroad labor shortages on rail service and traffic, there have recently been some improvements in rail service metrics to give us hope that we have seen the worst. But the number of operating employees remains a key constraint for carriers heading into 2023. Without significant hiring, rail service improvements will be tough to maintain. We saw 2022 railcar load volumes in line with 2021. Markets like grain and automotive carried meaningful momentum into the New Year, but other markets such as chemicals and metals experienced notable headwinds late in 2022. At the same time, the number of railcars in storage ticked up, consistent with normal seasonal trends and the volatility in carload traffic, but still remained well below the five-year average. We continue to expect the existing fleet of railcars to remain tight in 2023, and replacement needs to drive new railcar demand. Moving to the bottom of the slide, I already mentioned our FLRD is above 25%, which is a significant step up from where it was last quarter. Our lease fleet utilization in the fourth quarter held steady at 97.9%, which is the same level we saw pre-pandemic and is evidence of a tight fleet. We received orders for 3,015 railcars in the quarter and delivered 4,400. We ended the year with a backlog of 32,270 railcars valued at $3.9 billion. We expect to deliver approximately 49% of this backlog in 2023. Given the multi-year order we booked in the third quarter, we expect some of this backlog to extend as late as 2028. Our backlog and recent inquiry levels represent replacement level demand, and our customers need these cars for supply chain management, which gives us confidence and visibility into our delivery forecast. Slide 5 shows the fourth quarter performance year-over-year. Our quarterly revenue of $591 million was up 25% compared to a year ago. Our fourth quarter adjusted EPS of $0.44 was up 450%, while our cash flow from continuing operations in the quarter of $62 million was down 69%. Our adjusted free cash flow of $138 million was up 394%. Slide 6 shows our full year 2022 performance compared to 2021. Our revenue just below $2 billion was up 30% from the year prior, and our full year adjusted EPS improved by 176%, as I previously mentioned. Additionally, our railcar deliveries improved by 50% in 2022 and our ending backlog was $3.9 billion. For the full year, cash flow was impacted by elevated working capital related to higher volumes of railcar deliveries and continued supply chain challenges. When you look at the year-over-year cash flow variance, it is worth noting that 2021 benefited from reflecting $438 million in income tax receivables. Please turn with me to Slide 7 for segment results. I've already talked about the strong FLRD and fleet utilization in the leasing segment. But I also wanted to mention our renewal success rate in the fourth quarter of 85%. Our success rate for the entire year was 82%, a level we have not seen since 2014. This success rate shows that even as we are able to increase rates at renewal to match rising current rates, customers continue to value holding the railcar and thus accept the higher rates. In short, the railcar fleet is still tight and we have a lot of visibility and stability on the leasing side of our business. Leasing segment revenue of $197 million in the fourth quarter reflects improved rates and net lease fleet investment activities. Our FLRD has now been positive for six quarters and we are starting to see those higher rates reflected in our financials. Leasing and management operating profit margins were 38.3% in the fourth quarter and were up sequentially due to net lease fleet investment activities. Margins were down year-over-year because of a general increase in maintenance, which tends to be cyclical in nature, as well as higher depreciation expense, mainly due to our sustainable railcar conversion program. In the Rail Products segment, quarterly revenue of $656 million was up sequentially and year-over-year due to higher deliveries and favorable pricing and product mix. Our pace of deliveries picked up as the year progressed and we exited the year at a higher run rate. In the first half of 2022, we delivered just under 5,000 railcars, which improved to over 8,000 in the second half of the year. Our operating margins in the Rail Products segment came in at 2.8% in the fourth quarter and 2.8% for the full year. We spoke at length in our third quarter call about operating inefficiencies and supply chain issues pulling down margins. Unfortunately, these issues continue to impact us in the fourth quarter. In addition to continued rail service disruptions, supplier deliveries have not kept pace with our scheduled needs and railcar completion on several lines fell behind. Furthermore, capacity at facilities has increased more slowly than expected to meet our original production schedule. Labor was a challenge with higher attrition requiring more hiring and onboarding than expected, which was significant given the increase in hiring we needed to achieve to match an increased production level, specifically in Mexico. The impact of rail service, supply chain, and labor issues was over 400 basis points of efficiency lost in operating profit. This means if our efficiency had performed as expected, our quarterly margin in the segment would have been about 7%, which is in the high-single-digit range we anticipated. We still expect to exit the planning period with Rail Products margins in the high-single digits as we expect these issues to ease through 2023. Finally, moving to Slide 8, I want to point out a few more key accomplishments. In December, we raised our quarterly dividend to $0.26 per share, an increase of approximately 13%, delivering on our three-year goal of double-digit dividend growth. Additionally, our Board approved a new share repurchase authorization of $250 million with no expiration. This gives us more flexibility on timing as we consider various methods of capital deployment. Our net lease fleet investment for the year was $178 million, slightly below our anticipated range of $250 million to $300 million. This is due to both a stronger-than-expected secondary market driving higher-than-expected railcar sales and lower delivery to the lease fleet given some of the supply chain issues impacting our delivery rate. Our pretax ROE was 10.4% for the full year. We ended 2021 with a full year ROE of 3.4%, so 2022 marked a significant sustainable improvement towards our strategic goal of mid-teen ROE. 2023 marks the third year of a three-year plan we introduced at the end of 2020. On our third-quarter call, we modified our operating cash flow target to a range of $1.2 billion to $1.4 billion to account for the sale of our highway business, higher working capital needs and geography of railcar sales. Other than that adjustment, we are on track to hit those three-year targets, and we continue to work toward hitting these metrics. Before I turn the call to Eric, I wanted to talk about a few themes in our business. First, despite supply chain and rail service challenges, we continue to see strong inquiries and have great customer relationships, which gives us confidence in order flow in the near future. In addition to EPS growth in 2023, I also want to emphasize that we are seeing a significant amount of operating leverage in our business and expect to continue seeing higher returns, which we think is a more impactful measurement of our business, given the value of our lease fleet and the visibility we have into our business. We continue to make organizational changes and initiatives to focus on positioning our manufacturing and leasing businesses to maximize value creation through tough external headwinds. The Rail Products Group is a strategic asset that provides revenue diversity and competitive advantage, but tends to be more volatile given this exposure to market and labor issues in the short term, which has certainly been the case this year. However, over multi-year periods, the business trends with the same railcar fundamentals as the leasing business and there is a significant return to be made. In closing, despite an unpredictable macroeconomic backdrop, I am proud of what our team accomplished this year. Operating any business does not come without challenges, but I have confidence in our ability to execute in 2023 on our three-year goals given the strength of our business model and the team we have in place. And now, I'll turn the call over to Eric to review our financial results.

Eric Marchetto, CFO

Good morning, everyone. I would like to start by congratulating Jean on being named Railcar Women of the Year by the League of Railway Women for 2022. I would also like to give a little more color on the Holden acquisition that Jean mentioned. Holden is a manufacturer of market-leading multi-level vehicle securement and protection systems, gravity-outlet gates, and gate accessories for freight rail in North America. We purchased Holden for an initial purchase price of $70 million with another $10 million minimum to be paid in installments over the next two years. There is more information on this acquisition in our 10-K, which we expect to file later today. This acquisition fits well with our strategy to increase exposure to less cyclical and higher-margin aftermarket parts, giving us more opportunities to serve our customers and diversify our revenue stream. Furthermore, as we see automobile preference move more toward SUVs and heavier electric vehicles, securement systems will become even more critical, and we look forward to being a market-leading provider while continuing to provide the quality and service that Holden's customers have come to expect. We completed two acquisitions in 2022, Quasar and Holden, and are in the process of integrating both these operations into our platform. We see value in optimizing our business with strategic acquisitions and continue to look for the right opportunities but remain selective in our evaluation of potential targets. If you turn to Slide 9, I'll start my comments with the income statement. In the fourth quarter, our consolidated revenue of $591 million improved sequentially and year-over-year due to higher external railcar deliveries and improved pricing. Our adjusted EPS of $0.44 per share in the quarter, also a sequential and year-over-year improvement, benefited from $236 million in lease portfolio sales driving a gain of $55 million. Moving to the cash flow statement, our full-year cash flow from continuing operations was $9 million and our adjusted free cash flow for the year was $138 million after investments and dividends. As has been the case throughout the year, we continue to have elevated levels of working capital to support a ramp-up in production and to mitigate disruptions in the supply chain. Additionally, our operating cash flow was negatively impacted by higher receivables balance associated with deliveries late in the year. In 2021, our free cash flow benefited from collecting approximately $438 million of income tax receivables. In line with our guidance, we ended the year with $38 million in investment in manufacturing and general CapEx, and we returned $154 million to shareholders through repurchases and dividends. Secondary market sales remained strong all year, and we recorded some sizable gains on railcar sales. As long as we are delivering railcars into our lease fleet, we expect to complete secondary market sales as an ordinary course of business, assuming market conditions remain favorable. This shifts cash flows from operating activities to cash flow from investment activities, even in a period of high deliveries, because the cash is reflected in operations when we sell our railcar directly out of our manufacturing, but the cash that is reflected investments when we sell a railcar out of the lease fleet. As Jean mentioned, our net lease fleet investment was $178 million for the year. In 2022, approximately 36% of our manufactured railcars were delivered to our lease fleet to meet customer demand, which was a gross increase in the fleet of $929 million. In keeping with our goal of modest fleet growth and aided by a strong secondary market, we sold approximately $751 million of railcars out of our fleet, which allows us to optimize the composition of railcars in our fleet to serve customer demand and keep utilization high. Please turn to Slide 10. We ended the year with liquidity of $398 million, representing cash and equivalents, revolver availability, and warehouse availability. Our loan to value of the wholly-owned fleet was 65.7% at the end of the year, remaining in line with our target LTV of 60% to 65%. We expect liquidity to improve in 2023 as we lower our working capital with improved supply chain conditions and higher deliveries. Our loan maturities at attractive rates considering the market dynamics. And now please turn to Slide 11. Let's talk about some of the expectations for 2023. When we set our three-year plan at the end of 2020, we stated we expected industry deliveries to sustain a replacement demand level, which we viewed as approximately 120,000 railcars over the three years. In the first two years of the plan, the industry delivered just over 70,000 railcars. We expect 2023 industry deliveries of 40,000 to 45,000, meaning we will end slightly below the 120,000 we forecasted at the end of 2020 for the three-year period. This number excludes sustainable conversions, which have been significant over the planning period. For Trinity specifically, we expect to deliver at or near our historic market share of industry deliveries. We continue to view this build cycle as rational, which will benefit our lease fleet through the cycle. Our three-year planned net fleet investment was $500 million to $600 million, which means we expect a net fleet investment of approximately $250 million to $350 million in 2023 to land in the forecasted range. Included in this investment forecast are new railcar deliveries to the lease fleet, sustainable railcar conversions, and modifications on our existing fleet, and secondary market additions, offset by sales in the secondary market. This is slightly higher than what we have invested in recent years. While a smaller percentage of railcars we deliver will go into our lease fleet than last year on an absolute basis, we expect similar internal deliveries and anticipate higher eliminations on a dollar basis due to a higher volume of deliveries at higher prices. Our current backlog to the leasing group for new railcars is $459 million. Not all of this will deliver in 2023, and railcar sales will offset deliveries to the lease fleet in our full year net lease fleet investment. Additionally, we expect manufacturing and other general capital expenditures of $40 million to $50 million similar to prior years. We are introducing preliminary 2023 adjusted EPS guidance of $1.50 to $1.70, which represents substantial growth over 2022 results. While we do expect some easing in the labor, rail service, and supply chain challenges of 2023, these issues do not go away overnight and thus are reflected in our guidance. We expect the pace of deliveries through the year to be relatively consistent, but quarterly consolidated financial results will be uneven, driven by the timing of planned maintenance expenses and net lease fleet activity. In closing, we have taken actions to optimize the balance sheet and improve the operating leverage of our business over the last several years. As we enter 2023, I am confident in our company's ability to outperform in a challenging environment and realize cash generation and higher returns, ultimately leading to higher shareholder value. And now, operator, we are ready for our first question.

Operator, Operator

We will now begin the question-and-answer session. Our first question will come from Allison Poliniak with Wells Fargo. You may now go ahead.

Allison Poliniak, Analyst

Hi. Good morning.

Jean Savage, CEO

Good morning.

Allison Poliniak, Analyst

Jean, I want to revisit your comments about the lease side. Storage levels are still low, but they are starting to rise. Can you provide more insight on this? You mentioned it was seasonal, but are there concerns that we are seeing some additional storage due to the current weaknesses in the market? Additionally, regarding the lease renewal success rate, what would be a reasonable range to consider for 2023? Thank you.

Jean Savage, CEO

Okay. Well, thanks, Allison. When we look at an 85% success rate on renewals, we haven't seen that since 2014. The market is still very tight out there. And so what we're seeing go into storage is more some of the seasonal fluctuations, not grain cars or not needing some grain cars. Consumer side, there's a little bit of weakness there that type of car going in. So we expect the market to stay tight, especially as you look at what's going on or expected to happen with attrition and new railcars coming back into the system.

Allison Poliniak, Analyst

Got it. And then within rail manufacturing, you highlighted a number of headwinds to the margin this past quarter. I'm trying to reconcile; you're looking for a sequential improvement there with deliveries remaining stable. Are you limiting sort of that capacity addition just because of the labor side that you're seeing? Just trying to understand what drives that margin higher here just with the level of deliveries at this point that you guys are indicating?

Jean Savage, CEO

Great question. When you look at it, some of the things that we've learned this past year is we've got a really strong backlog that allows us to have good visibility. We're extending the time or the view that we get from the supply base to be able to see that. We still have seen at the end of last year, I think we talked about it, fewer rail suppliers to provide product, and they're still having issues. As we went into the fourth quarter and wanted to ramp our production, their ability to deliver on time went down. So it went the opposite direction. They had stabilized at the lower run rate. So now they've got a good view for the year of what we need, and we're expecting them as the year goes on to get better at delivering on time. For us, we took some actions in the fourth quarter as far as labor goes, and we've seen some improvement. Therefore, we are getting a little bit better on our ability to attract and retain employees. We're not at the level of employees we need for the full year production yet, but we're getting a lot closer.

Allison Poliniak, Analyst

Great. Thank you.

Operator, Operator

Our next question will come from Matt Elkott with Cowen. You may now go ahead.

Matt Elkott, Analyst

Good morning. Thank you. So at first glance, it looks like maybe you're expecting lower deliveries in 2023, but because the high end of your delivery guidance for the industry is lower and the low end is actually lower than the actual 2022 number. But then, Eric, based on the remarks you made, I think you mentioned you expect your share to be consistent with 2022 and I think that was 34%. So if I take the midpoint of your delivery guidance for the industry, I'm coming up with just over 14,000 cars for '23, so that's up about 5%. Is that math okay?

Eric Marchetto, CFO

No. Matt, sorry if I wasn't clear. I talked about historical market share ranges in that 30% to 40% range. So if you take the 40% to 45% and apply a 30% to 40%, then you'll get a band. And our deliveries will be up more than what you're calculating.

Jean Savage, CEO

So last year, remember, we had 5,000 cars delivered in the first half and 8,000 in the second half. And I just said that we're not at the number of employees we need for the full year production to help you a little bit on where we're expecting to go.

Matt Elkott, Analyst

Okay. Got it. That's helpful. And then my next question is, I know you had some benefits from storm recovery last year that affected the margins positively, but you also have the supply chain disruptions this year. Your deliveries were up year-over-year by 36%, but your margin was down. Can you help us understand how much was the storm recovery benefit part of that versus the supply chain disruption this quarter?

Eric Marchetto, CFO

The storm benefit we adjusted out and so, that's the big difference between the $0.94 and the $1.02. And in the slides, there's more color in the rail segment around, especially in the quarters that those recoveries were received, you'll see that in their math. In terms of the headwinds, they outweighed the storm recoveries by a wide margin. Jean mentioned the 40 basis points in the fourth quarter, that's much more than the storm recoveries.

Matt Elkott, Analyst

Got it. And then just one last industry-related question. Do you guys foresee any potential changes to Class II flammable liquid regulation when it comes to tank cars or any other type of cars similar to what we saw for crude regulations after Lake Megantic?

Jean Savage, CEO

So there's a lot of discussion going on and a lot of phone calls. I think we got to wait for the NTSB to come out with their findings on what happened. But I would expect movement in some sort, either on safety, how they ensure that the trains are shaped going through on manifests sharing and other things like that, but we'll have to wait and see. We're discussing right now.

Matt Elkott, Analyst

Great. Thank you, Jean. Thanks, Eric.

Jean Savage, CEO

Thanks.

Operator, Operator

Our next question will come from Justin Long with Stephens. You may now go ahead.

Justin Long, Analyst

Thanks and good morning. I wanted to ask about Rail Product Group margins. Jean, it sounds like you expect to be in that high-single digit range by the time we exit this year. But can you help us think through the cadence of margins assumed in the guidance and how you expect that 400 basis point headwind you called out to fade over the course of the year?

Jean Savage, CEO

We're not giving quarterly guidance, but I will tell you that as Eric mentioned, we don't expect those headwinds to go away overnight. So we expect them to improve and go away throughout the year. So I would just say, take that into consideration as you're looking at the overall year or quarters.

Justin Long, Analyst

And Eric, you did mention there would be some lumpiness, I think, in profitability. So is there any color you can give us around that comment as we think about modeling the quarters this year?

Eric Marchetto, CFO

Yeah. I think, as Jean mentioned on the Rail segment side, you see improvement. The lumpiness would come more from eliminations and car sales. This year, more or fewer of our deliveries will go to the lease fleet, which will mean there are fewer investments in the fleet, which is in that $250 million to $350 million range. But the car sales, especially when you think about the Wafra transaction, historically, we've done that in the second half of the year. This is year three and that three-year program agreement. Therefore, there will be some lumpiness from the gains on sale.

Justin Long, Analyst

Okay. And last question I had was on cash flow. I was curious if you could share any expectations for 2023. I know there's some moving pieces with working capital that you mentioned? And also on the buyback with the new authorization, could you comment on what's getting factored into the EPS guidance for buybacks?

Eric Marchetto, CFO

When you look at buybacks specifically, we've returned a lot of capital to shareholders over the last few years, certainly, and we did finish our last authorization and started a new one in December. I would characterize our share buybacks this year in terms of capital allocation to be more opportunistic and modest regarding the amount of capital we're returning via share buybacks. I think we just raised the dividend in the fourth quarter to $0.26 per quarter. More of our capital to shareholders will come through that mechanism, at least as we're sitting here today. And then, I'm sorry, the first part of your question was on cash flow.

Justin Long, Analyst

Cash flow expectations.

Eric Marchetto, CFO

When you look at our three-year Investor Day plan, we made a slight reduction to the cap last quarter. We are still within that range considering the events of the fourth quarter and our current position, though we may be on the lower end of that range. Our cash situation indicates that this platform can generate a substantial amount of cash, and we anticipate this will continue in 2023.

Justin Long, Analyst

Okay. Great. Thanks for the time.

Eric Marchetto, CFO

Yeah. Thank you.

Operator, Operator

Our next question will come from Gordon Johnson with YOU’RE. You may now go ahead.

Gordon Johnson, Analyst

Hey, guys. Thanks for taking the question. So maybe this one for Jean. Just taking a step back, looking at the U.S. economy. Looking at retail sales, the engine that drives the U.S. economy, now down three of the past four months, real disposable income saw the surplus fall in 2022 dating back to the 1930s Great Depression, real consumer spending on services was flat in December. Are there always monthly readings in nearly a year, real average weekly earnings are now down a record 21 months in a row. Auto sales growth slowed in January and 2022 was the worst in nearly a decade and home sales last year were the lowest since 2014. I know a lot of data points, but it just seems like we're taking that into account and also looking at Midwest region average truck rates or other delivery rates. It seems like things are looking pretty bad, not to sound too dire. But is the guidance you guys are giving back end loaded? And if it is, do you see some risk to that? And then a follow-up. Thanks.

Jean Savage, CEO

Sure. In looking at manufacturing statistics, we observed a slight decline in November and December, but there was a recovery in January. The consumer sectors are definitely experiencing the most weakness, including intermodal services. However, overall, we are still seeing very high utilization of our vehicles. Traffic remains consistent compared to 2021, and customers continue to express interest in transporting more goods by rail. Therefore, we believe we can manage well, or be resilient, even in the event of a mild recession. Our backlog currently stands at $3.9 billion, providing us with good visibility for this year.

Gordon Johnson, Analyst

Thank you for that. Lastly, regarding free cash flow, I know a question was raised about it, but the cash burn for this quarter, based on operating cash flow minus CapEx, was approximately $900 million. Are there any plans concerning capital decisions? Thank you for the questions.

Eric Marchetto, CFO

Yeah, Gordon. This is Eric. If you back out your $900 million, I think you're looking at all the lease fleet investment, and I'd just refer you to our adjusted cash flow in the disclosure where we kind of walk through the fleet investment. It's a big number, but once you finance it, it doesn't require much cash. Also, a reminder, that's pretty tax-effective capital investment. So from a cash flow standpoint, it's a relatively good answer. And I'd just refer you to our disclosure on that.

Gordon Johnson, Analyst

Thanks again.

Eric Marchetto, CFO

Yeah.

Operator, Operator

Our next question will come from Steve Barger with KeyBanc. You may now go ahead.

Steve Barger, Analyst

Thanks. Jean, you said Trinity is generating good operating leverage. To that point, incremental margin came in around 20% for 2022. As you think about the mix for '23, do you expect incremental contribution margin to come in above that?

Eric Marchetto, CFO

So Steve, when you look at the earnings guidance that we've given, there's some color around fewer car sales and deliveries that would imply a pretty healthy incremental margin. So it kind of depends on the range you are in. But I would expect the incremental margin to be at a very good clip in 2023, as we're sitting here. I don't know if we're going to give specifics, but your math is correct. When you look at just the volume we are talking about and the step-up in earnings of 70%, but surely there is a lot of that coming from incremental margin.

Steve Barger, Analyst

Right. Well, and it has to come from the Rail Group, right? Because you put up a huge incremental margin on lease in 2022?

Eric Marchetto, CFO

Yeah, correct.

Steve Barger, Analyst

Okay. And you said when you ramp production, on-time delivery went down. Why is that? Could they not get material? Are they having their own labor issues or are these diversified suppliers who are prioritizing capacity to other industries? Just what happened with the supply base?

Jean Savage, CEO

Many suppliers faced labor challenges similar to others in North America. Over 95% of the materials used to manufacture our railcars come from North America. Initially, suppliers adapted to the production rate, but when we sought to increase that rate, they struggled to keep up. They are currently addressing these issues. We have noticed some improvements, but occasional challenges with various components still arise. It’s important to note that we are attempting to provide them with better insight into our needs. Usually, we give them a 60 to 90-day notice, but we are trying to extend this timeline, particularly given our existing backlog.

Steve Barger, Analyst

Got it. And I've been jumping around on the call, so sorry if I missed this. But Eric, I think you said you're prioritizing more dividend versus buyback in '23. First of all, did I hear that right? And well, I guess, we'll just start there.

Eric Marchetto, CFO

Yes, Steve, you heard correctly. The question earlier was about how much share buybacks are included in the guidance. I mentioned that it is modest and that more of the capital allocation is being directed towards the dividend.

Steve Barger, Analyst

Is that going to be sustainable? You've obviously taken out at 45% of the shares in the last six years or so. Is this a shift that we should be thinking about on a go-forward basis, that more cash will be allocated to the dividend?

Eric Marchetto, CFO

I think it's more of a phenomenon for this year. We had our three-year plan, and we talked about significant share repurchases and dividend growth. I think by all accounts, we've accomplished that. As we think forward to the next three years, we will provide more information on that, but we're not doing at this time.

Steve Barger, Analyst

Understood. Okay. Thanks.

Eric Marchetto, CFO

Thanks.

Operator, Operator

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

Jean Savage, CEO

Well, thank you, and thank you again, everyone for joining us this morning. We believe we are well positioned for a strong year in 2023. Our guidance reflects higher lease rates, higher deliveries and efficiency improvement driving higher margins and generating cash flow. I want to thank our team for their hard work this year and their ability to execute in a challenging environment. Thank you again for your continued support.

Operator, Operator

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