Thanks for joining us. We're excited to get started with day two of the conference. Yesterday was a really good and successful day. Appreciate everybody's support. And, you know, we're looking for an exciting day two and are very pleased to be starting off with Trinity this morning. So from the company, we have Eric Marchetto, who's the chief financial officer. So first off, Eric, good morning. Thank you for joining us. Good morning. Thank you.

Thanks, Chris.

Absolutely. It's my pleasure. So, you know, I guess maybe let's start sort of big picture. We always like to sort of get a bit of a lay of the land of how we're thinking about things from a macro perspective. So maybe we can start just big picture, how you're thinking about the world that we're in right now. Obviously, ISM has started to look a little bit more positive over the course of the last several months. We have seen some other freight indicators that are looking a little bit more constructive, whether they be car loads or some stuff that's happening on the LTL side. So maybe just big picture, how are you seeing the world? And then we can dig into the businesses themselves. Sure.

Yeah, great. Similar view that we are seeing, as you mentioned, ISM. We're seeing rail traffic in our sector pick up modestly, kind of showing some good growth. And we drill down and look at everything, kind of industrial production as a big driver for us is U.S. industrial production. We are seeing healthy signs, both on the employment side and some of the survey data. So from that standpoint, it's been good. You know, there's still a cloud of uncertainty in the market, especially in the U.S. industrial economy. Everything outside of data centers and energy, there's still some uncertainty there. And you see, and prices are higher. And so we've seen a lot of inflation pull through in the new car market. That has made the existing car market more expensive as well. And so, you know, it's hard to tell if people are waiting for prices to alleviate or if it's just the uncertainty. But But we're still seeing, with all the tariff changes that there have been, weekly changes in tariffs, we're seeing our industrial customers with a difficult time planning, making CapEx decisions. So the result is they tend to hold what they have and kind of freeze. It's kind of like driving in the fog. You wait. People are waiting it out.

Got it. And so let's talk a little bit about the businesses. So you do both the rail car manufacturer. You're also a lessor.

So I guess maybe talk a bit about the synergies of those two businesses. what's the value of the platform together yeah well we we do talk about it as a platform yeah and so um really when you look at it what my belief is that by having a large leasing business and a large manufacturing together along with our maintenance services we also have some other logistic services that we offer uh all of those things when you put together give us a very strong view of the market i would argue it's the best view of the market uh in our space And it's because we serve both railroads, lessors, and industrial shippers. Our platform predominantly serves industrial shippers, but we sell direct to leasing companies. We sell direct to Class 1 railroads. We lease to Class 1 railroads. We sell to industrial shippers. We primarily leased industrial shippers. So all those things mean we see a lot of opportunities. And so we believe we see change in demand, inflection points, and we have very good market knowledge. And so all that gives us a good reach. We're able to serve our customers well. Having the manufacturing and leasing together also gives us the ability to originate content, which is a real differentiator for us. And so having those things together, we originate a lot of new rail car leases. But we're also pretty active in the secondary market, both buying and selling in the secondary market. And for a lot of the other lessors, the primary market has turned to the secondary market just because of everything going on in the primary market. So we're seeing a lot of lessors really look for existing rail cars, and we're able to serve them through our fleet there as well.

And so it seems like the shift has been more to the leasing side and services and a bit away from manufacturing. So I think I understand the logic there, but maybe let's walk through kind of like the strategic thoughts behind that shift towards lease.

Yeah, sure. When you look at our balance sheet, our capital is predominantly in the lease fleet. And so it stands to reason that where our capital is, we've shifted our focus more to the emphasis on the lease fleet. Those are long-lived assets, 40, 50-year assets. And so it's really about protecting that residual value, making sure the supply demand stays in balance. And we have some level of influence on that with having a manufacturing arm. And so all of our demand goes through our lease fleet. And so we were not going to build a new rail car unless if we have it in our existing fleet. So the result is probably on the margin, a little more efficient market player. 20 years ago, we may have built a rail car that wasn't needed in the market because we didn't have it in our lease fleet. Today, because of our large lease fleet, 150,000 rail cars that are either owned or we manage through our RIV investors, it gives us pretty good market presence. And so it's a more efficient model. It's much more efficient to lease an existing rail car than build, invest in a new one. And so, you know, the proof should be on our return on equity through the cycle. And we've produced some really good return on equity through the cycle now.

So what is the sort of goal? What's the mix, the optimal mix of the business, do you think, whether it be in the next couple of years, longer term, nearer term? How are you thinking about that?

Well, we have a goal. We did an investor day a couple of years ago, and we talked about what would characterize as modest fleet growth, adding $750 to a billion of net fleet growth over the three years. This is the third year of that target, and we're right on pace to come in in that range. Yep. You know, we're pretty disciplined when it comes to that capital allocation. We want to grow our fleet, but we want to be smart about it. The returns have to be there. And so that's really the only time you have an investment decision on these rail cars is when it's new. After that, it becomes more like real estate. You're trying to maximize the revenue. And so we try and be very judicious with our investment decisions. And that's kind of where we are right now. We expect to continue to grow it. There's good returns in the business. If the returns aren't there, we'll pivot and change our capital allocation strategy.

And so that few hundred million a year kind of pace that you've been on, is that the right way to think about the go forward?

I think if the returns are better and there, it's a pretty small market right now. We're in kind of a down cycle. We're building less than replacement level. And so we certainly, if you get back to normal replacement level or even a little bit of growth, I can see that investment growing from there. But that's kind of where we are at the bottom of the cycle in terms of fleet investment growth.

And let's talk a little bit about the end market. So I'm curious from like a rail car type or where there's opportunities, where strengths, what's strong, what's weaker in this environment.

So just to frame it, we look at the market in five broad segments. Chemical, refined products, energy, agriculture, metals and mining, and then consumer auto. When you look at our lease fleet, it's really those three markets, the chemical, refined products, energy, and ag. We predominantly do full-service leasing. That customer base on those three segments really value the full-service leasing. And so that's where most of our fleet is, but we serve the whole market. And so where we see demand, we are seeing some growth with metals, things like that, all the data center growth, that sort of thing. The agricultural side has been resilient. It hasn't been great, but it's been steady. The chemical side, we've seen coming into the year, they had a lot of margin pressure, I think, with what's going on in the Middle East. There's been more volatility there, but they've probably done a little better as a result of that. On the energy side, people from 10 years ago always think when it's rail, on the energy side, it's crude by rail. It's really more a lot of those refined products that we're seeing. We are seeing good demand on the refined products in the energy side.

Okay, that makes sense. I guess, can we talk a little bit about lease rates and how you think about the trajectory of lease rates?

Yes, sure. You know, when you talk about inflation in the US economy and in a broader economy, and we talk about 40 or 50 year assets, these are real assets. And so, and with all the tariff policy, you've seen US steel go increase a lot. And a rail car is predominantly made of steel, whether it's steel plate or cast products, it's all steel derivatives so we've seen inflation in new rail cars uh over a long period of time over the last 20 years we've seen about three to four percent annual inflation in new rail car prices yep uh we've seen one to two percent inflation in lease rates over that period uh so i my belief is there's some catch-up that's needed uh and and where we are in new rail car prices uh there's still a lot of inflation coming through uh labor costs aren't going to go down energy costs aren't going to go down, and steel costs probably aren't going to go down. Their backlogs are strong. And so that makes new rail cars that much more expensive. Factor in where treasury rates are, where funding rates are, that makes lease rates on new rail cars more expensive. So that allows that existing fleet, it provides a gap that your existing car fleets are here and new cars are here. There's a bit of a gap that you can close. And a 10 or 15 year old rail car, our fleet is 14 years old on average, has very similar utility to a new rail car. So it stands to reason you'll be able to price that up. That takes time. You know, generally we reprice about one-sixth of our fleet a year. We have a metric that we call our future lease rate differential. That has been double digits for the last four years. It dropped down to single digits the last two quarters. I think that's more of a pause than a trend. Because of everything else we're seeing in the market. So I would expect lease rates to continue going up from here in the aggregate. There'll be certain car types that are softer and stronger, but in the aggregate, I would expect that inflation will pull through.

And how does utilization sort of play into this? I think last year it was 97.1. How do we think about that and the interplay with lease rates?

There is certainly an interplay and utilization has held on. It's improved at the end of the first quarter was 97 two or three and so that's held on nicely and there is always a play we really look at the overall yield in the fleet and make sure we're improving the yield in the fleet utilization is important because if you get cars back it's generally there's a maintenance event you have to remarket it but we have been very successful in assigning existing rail cars when they do come back and getting them back in service and thus maintaining the utilization the way it is but you really we're looking at the overall yield on the fleet and how do we keep improving the yield on that asset yeah that makes sense i guess you know i'm curious about the the

napier park transaction maybe we could help kind of walk through a little bit there and what the opportunity i think comes from that for you guys as we look forward yeah so great um so the napier Napier Park, we have, in other asset classes, they'd call them sidecar investments.

We have what we call our rail car investment vehicles, which is passive capital that wants to own rail cars without building out the infrastructure. Napier Park has owned a fleet of rail cars that we've managed back since 2012, 2013. That was fund capital, private credit capital. Their fund was getting them to the end of life, and so they were raising a new fund, more of an evergreen fund that's probably a better owner of these railcar assets because of long lives. And so we were also an owner of those assets, roughly about 40 percent of those assets. We consolidated them on our balance sheet. So the result was we never booked any profit, manufacturing profit or gains from selling those railcars to them because they're all consolidated in our fleet. So back last year, they raised a new fund. We had a lot of control rights in that fleet. The control rights was not going to be conducive to the new fund. So we contributed those rail cars into their fund. There was another portfolio that we also own 40 percent of. We took 100 percent of that, so we effectively traded. When we When we did that, the rail cars that left our balance sheet, there was a lot of pent-up value in those. We transacted at market value. The result was a $190 million gain that we realized in the fourth quarter of last year. And those rail cars went in the new fund. The other rail cars went wholly on our balance sheet. Fast forward into the second quarter of this year, there was another group of rail cars that we did the same thing for. we contributed those rail cars that we own 40 percent of took an 11 percent interest in all of their rail cars about 30 000 rail cars uh and that uh we realized 130 million dollar gain on that so at the end of the day what we have now is roughly 50 000 rail cars that are in our managed portfolio that we have an equity interest in but it won't be consolidated we will uh uh recognize the income on more of an equity basis accounting on our 11% or on our partial interest in those rail cars. And we manage them. And so we manage them as one fleet. We are blind ownership. We market those. It's just part of our fleet. It's got our marks, one contract. And the result is we get fee income and we get some of the residual income from owning our 11%. It's simplified our balance sheet. We had a lot of partially owned assets and partially owned debt. So from that standpoint, you know, in minority interest, which it's not everybody has minority interest. So we simplified the balance sheet from that standpoint. We think it cleans up the story. But at the end of the day, what it demonstrated was there's a lot of value in our rail car fleet. We put our rail cars on our fleet at cost, at least the 90 percent or so that we manufacture in our fleet. And with a 15-year-old fleet, you see, I've talked about 4% inflation a year and rail car assets, you depreciate them over some time. The economic depreciation is a lot less than the book depreciation. And so when you fast forward to today, we think the value of our fleet is 35 to 45% higher than the carrying cost of our rail cars. and we can realize that that should come you know through higher returns uh with a lower basis in our fleet or when we sell cars we'll have uh probably a little higher gains than the most would have and so you know don't read too much into that but it's just it's i think it surprised people that um there's so much value there and then i guess like maybe this is a combo question here you know is there more to be done with third-party capital are there more opportunities for you to do this?

Obviously, that 35% to 45% seems interesting, so there's maybe opportunity to monetize that. So how do you think about that?

Yeah, so the 35% to 45% is the railcars on our balance sheet that we own. Railcars are an attractive investment, but it's a long cycle. We have a few partners that we work with that want to own railcars but don't want build the infrastructure uh by doing this and also with the uh brookfield gtx wells fargo combination i think that's open eyes to other capital coming into the space yep and so we certainly are having a lot of conversations with folks um it's it's a it's a it's a long sales cycle to say the least because you know it's highly structured uh but you know the fundamental I think the big takeaway is these are attractive investments. You've got capital in the market looking for yield, and rail cars offer some nice risk-adjusted yields. So there should be more to come from that.

Okay. And then I guess maybe if we can think about sort of how you think about debt, ABS versus maybe other opportunities for you, sort of how do we think about where your debt levels are today, what you maybe want them to be or what you think could be a target over time, and then, you know, the products that you're kind of focused on.

So we hit the capital markets two different ways. With our lease fleet, we hit it through the ABS market, and that is non-recourse debt. The leases are a very good way for us to access the capital markets. We generally access the capital markets through that market as a AA issuer. We've been an issuer in that space since 2002, so long history there. And so we're able to get pretty good access to funds by accessing it as a double A. We also access the market as a high yield issuer, double B, double B plus credit. And there is a differential. The ABS market is generally about 75 to 100 basis points more attractive. That comes with some structure. But that structure is pretty normal for us. And so from that standpoint, it's good. But we also see the high-yield market as an opportunity to continue to access. And there's a little more flexibility in the high-yield market versus the IG market. And so we like that as well. But most of our debt comes through the ABS market. In terms of debt levels, we look at it two different ways. On the ABS side, we look at loan to book value. And we're running right around 70%, 69%, 70% right now. Our range is 60% to 70%. But you access the ABS market on more of an appraised value and income approach. So we certainly could raise that. We've got about $900 million of unencumbered equipment on our lease fleet. But we don't see a need to do anything with that. We've got goals that we've talked about, 60% to 70%. We're going to stay in those goals. When you look at more on a consolidated basis, we look at debt to total capitalization, we're running right around 81%, 82% there. Very comfortable with the amount of debt we have on the balance sheet. And so the result is we keep paying the dividend, raising our dividend, and buying back shares periodically.

And then just to wrap up, I know we talked a little bit about pricing, and I think it's come down a little bit the last couple quarters. Can we just, you know, but I think you think we'll stabilize and start to see that moving up as we go forward the next few quarters?

Yeah, I think there's the underlying trends are there's still inflation in the market. And so that really, and especially with what's going on in the treasury market, you know, they're $4.50 plus today on the 10-year. That earlier in the year was $4.20, $4, even $4 at one point. And so I think you'll continue to see some inflationary pressures in the existing car market.

We did a survey yesterday morning, and I think the consensus is for a 25 basis point hike as we get a little later on this year. So we'll see where those numbers go over time. That's shocking how much, how fast that's changed. Exactly. That's right. So consensus has moved a little bit here. That's fantastic. So let's pivot a little bit to the rail products group and maybe talk a bit about manufacturing. Let's talk a little bit about the delivery pace for this year and maybe early thoughts on what you might expect for next year.

Sure. So just framing the overall market, we would say a normal market is around $40,000. We did our three-year look a couple years ago. We put out guidance that we thought the industry would do about $40,000 a year. Last year, we did about $31,000, and a lot of that was all the macro uncertainty. This year, we expect to do about $25,000, so another step down at 20%. so pretty dramatic if you think about other industries 20 down year over year uh there'd be you know there'd be people in front of congress uh looking for bailouts not in our industry that's kind of our normal that's our normal okay uh and so um we expect about 25 000 that is well below replacement level we'll scrap uh probably 35 to 40 000 rail cars this year as an industry And so that fleet will remain tight, especially with rail car loadings improving. And so as we, you know, it should get back to 35,000, 40,000 rail cars within the near term. And we expect next year you'll start to see that. We haven't really seen the order intake to support that inflection point. So I'm looking for that later this year, hopefully. It's taken longer than I've expected just because the uncertainty has lasted longer than I expected. But at some point, it's got to come back. What I'm really pleased with on the manufacturing side is even at these low levels, we've produced some pretty good margins. And so in the first quarter, our rail group margins were about 7%. We've got a guide of five to six for the year at our rail group. And so at these low levels, being able to produce solid single-digit margins, I think, is a testament to the work that the team has done on taking cost out. And as the volumes come back, we see a lot of operating leverage in the business, and we would expect those margins to improve pretty dramatically as the volumes come back.

And how do we think about tariffs here? So we've got the Section 232 tariffs, I guess. How do you think about that in the context of tank cars? What do you think your exposure is? What can you guys do for mitigation?

The one thing I know is the rules keep changing. And so trying to keep up. There are there are some there are new 232 tariffs for tankers that make entry into the U.S. Our tankers do not make entry into the U.S. And so we're trying to get clarity from CBP of what all that means. But right now we keep working to get clarity. uh it it just adds to the uncertainty and so i think what what will the result will be people will pause on making investment decisions on tank cars in the near term just because of the uncertainty uh we're certainly hearing that from lessors as we call on them uh on the freight car side um you know we're seeing a modest pickup in the demand there hopefully that's a sign of things to come but uh the only thing i can say for certain with tariffs is they're going to change that's for sure between now and uh our conference call they'll change okay more to come but they're not making entry right now i guess is your point right so there is a little bit of that distinction

versus what's been stated exactly okay all right that's helpful i appreciate you giving us that color um you noted this sort of inflection in in in numbers uh on the manufacturing side that you're expecting what are typically the benchmarks that we should be watching for that'll give us you know some clarity that this is actually happening we talked earlier about ism and overall industrial activity? I don't know if that's a correlation that we should be particularly focused on or is there something else?

You know, so ISM is a good metric. Also, just we look at rail traffic. Rail traffic is, you know, even for those outside of the rail space, it's great data because it comes in weekly. It's effectively real time and it's across a lot of different markets. And so when we look at that rail car data, we do some other stuff with the data we see kind of a supply demand balance and we can look at things like that um also our inquiry levels we look at our inquiry levels and our inquiry levels are supportive of of we're starting to see things coming the the counter to that is people are taking longer to make decisions you know and that just speaks to the uncertainty which is code for tariff talk yeah you know it's just there's always people it's difficult to plan i thought with the midterms coming up, we'd get more clarity, and we've probably gotten a little less clarity.

Yeah, no, it seems like the tariff stuff took a pause for a period of time earlier in the year and maybe has come back a bit more recently as a source of that. Or we at least got numb to it. Yeah, maybe. That's certainly possible. We spent a lot of time working on a lot of brain damage last year, that's for sure. And then inquiries to orders, that conversion process, how does that typically play?

Yeah, typically, it's fairly predictable, but lately, there's been a little bit more of a pause on it. It's extended a little bit in terms of, and that just, it just talks about what we just talked about. So it's not as, it's softer now in terms of converting those. Okay. Both on existing cars and new cars.

So I guess, you know, you took up guidance decently in the first quarter. I think that's higher gains, but then, you know, you got secondary market sales and the deal. You know, I guess how can we disaggregate that and think about sort of the gains? You have the deal and an underlying business and think about sort of what the key drivers are of the upside.

Yeah, the upside is primarily the gains. And so when you look at the underlying business, the underlying business, we haven't seen a lot of change in it from our original guidance in February. And that's good because we had still a lot of rail cars to sell to hit our guidance this year. and they've kind of come in as as we've expected and so from that standpoint um you know that that's been kind of no change is positive uh because things are coming along uh you know on the gain side uh they can be lumpy they're opportunistic it's a very robust trading market right now yeah as i mentioned most of your other uh independent lessors are sitting out the primary market and they're focusing on the secondary market which means it's a pretty deep uh broad market in terms of buyers and sellers and so there's a lot of activity there we we access it both on both sides of it we see opportunities on both sides of it and so uh that's probably where there's more very variability within the business you'll get some variability quarter to quarter especially on the maintenance side the fleet you know it's all for full service leases large tank our fleet so compliance can uh it's predictable on an annual basis it's not as predictable on a quarterly basis and so you'll get some variability there uh but you know in the lease business it's fairly predictable i talked about you know about 15 of our fleet up for renewal on an annual basis that means 85 of it isn't and so you know contracted cash flows we ought to be able to project those pretty effectively um and so there's a lot less village volatility there

and so that sort of speaks to like the normalized earnings power that's the way you should be thinking about the algorithm there okay that's super helpful okay um and if there are any questions from the audience feel free uh raise your hand we'll get you in there um if you have any questions um so i think you talked about 1.2 to 1.4 billion in cumulative cash generation over that 24 to 26 sort of planning period i guess how do you think about deployment we talked a little bit before about you know maybe where the investment opportunities are coming but how How do you think about that between sort of the fleet, the secondary market, and working on the debt, and sort of all the- So yeah, that's the beauty of this business.

It generates a lot of cash flow, and it's fairly predictable. And so what we're going to do with that cash, that 1.2 to 1.4, first we're going to invest in the fleet. So that's the $750 to $1 billion of net. That's before you finance it, so you can leverage that where it's not $750 to $1 billion of cash. We pay a dividend of about $100 million a year. We've grown that dividend for seven, eight years straight. And so a healthy dividend on the debt side. Our ABS debt amortizes monthly. And so there's always some cash flow that's going to pay down debt. And then when we refinance rail cars, there's usually you get more cash out. And so that will continue. Overall, I don't expect big changes in our leverage profile. We're opportunistically buy back cash, and we're opportunistically look at M&A opportunities. M&A opportunities, probably more on the fleet side than, you know, other operating businesses. But we've bought a few over the last few years, and we'll continue to look at other kind of bolt-on adjacencies that'll just round out our platform.

Does it feel like a better or worse M&A environment than what you've seen in the last several years?

It's probably a little – there's probably a little more realism in the bid-ask. But, you know, in the last couple years, people remember those multiples from a 2% or 3% interest rate environment and not from a 4% to 5% benchmark. And so I think that's – I think people are starting to realize. And I think also what you mentioned earlier, if people's outlooks or interest rates are going to go higher and not lower, then today may be better than tomorrow.

Yeah, absolutely.

And so that will probably lend to a little more tightness around that bid aspect.

Yeah, that makes sense. And I guess maybe to wrap up, I guess kind of what's the sort of three to five-year outlook? look, how do you guys think about the world for Trinity beyond just sort of the near term in terms of how you want to size these businesses and sort of where you think the opportunities will take you?

Yeah, so over the medium term, I expect this business to really outperform from a return on equity and an economic profit standpoint. I think the fleet will continue to improve the yield. I think manufacturing is at, you know, what should be at the bottom of the cycle uh and so really when you start getting mid-cycle uh this business especially the rail group will generate a lot of cash yep uh and so it'll be it'll be fun to do something with that cash whether that's in fleet purchases or or whatever whatever uh whatever that may be but i you know we look at the returns on equity in the business and i would expect those to we we've run 24% the last trailing 12 months and going back a little bit further and I would expect that will continue.

Got it. Well, listen, Eric, this is super helpful. Appreciate you spending some time with us this morning. Thanks, Chris. Great way to kick off. Thank you. Thanks, guys. Appreciate it.