Market Overview

Trinity "Right-Sizing" Production Capacity With Market Demand

Share:
Trinity "Right-Sizing" Production Capacity With Market Demand

Trinity Industries' (NYSE: TRN) is working on "right-sizing" its production capacity in 2020 to better align production levels with market demand, company executives said on Feb. 20 during Trinity's fourth-quarter earnings call.

The result of this "right-sizing" could be a headwind in Trinity's first-quarter financial performance, but Trinity's efforts to cut railcar deliveries by roughly half in the first quarter compared with the number of railcar deliveries in the fourth quarter will enable the company to achieve its railcar delivery outlook for 2020, said Eric Marchetto, Trinity senior vice president and president of TrinityRail.

Trinity's said Wednesday when it initially unveiled its results for the fourth quarter of 2019 that it expects railcar deliveries in 2020 to total around 16,000 railcars. 

Marchetto said today that approximately 17% of Trinity's railcar leasing portfolio is up for renewal in 2020. Current market rates are approximately 9% below expiring rates, which could result in a 1%-2% reduction in Trinity's railcar leasing segment in the first quarter.

However, North American railcar loadings are improving for certain commodities, including chemicals, refined products, farm products and autos, Marchetto said. Trinity also sees replacement demand occurring mainly for the boxcar fleet, he said.

The headwinds that the rail industry faced in 2019, such as trade disputes and the slowing industrial economy, resulted in growing a fleet of underutilized railcars, which in turn reduced new railcar orders, Marchetto said. 

Although it might take some time before the recent trade agreements between the U.S. and China and the U.S. and Canada and Mexico impact North American rail volumes, Trinity hopes the trade progress "will inject more clarity and certainty into the market." Marchetto said.

"Improved railcar loadings will need to first absorb existing railcars before new orders accelerate," Marchetto said.

He continued, "We are encouraged by the recent narrative of some Class I railroads to focus on growth versus operating ratios. While PSR [precision scheduled railroading] initiatives seemingly improve the train speeds and dwell times for individual railroads, the fluidity of the rail network is key to improving the performance of the rail supply chain. Longer term, we believe PSR initiatives are an integral first step to improving service levels for industrial shippers. This is necessary for the rail market to regain modal share in the North American freight space."

Trinity's new president and CEO, E. Jean Savage, said she would be working on several initiatives throughout the year, including defining a strategic framework for the company that would consist of key performance indicators. Savage will be sharing the framework with investors later this year. 

Fourth-Quarter Results

Trinity's net profit in the fourth quarter of 2019 fell amid higher expenses, although quarterly revenues grew nearly 16% year-over-year.

Fourth-quarter net income attributable to Trinity Industries totaled $21.6 million, or diluted net income of 17 cents per share, compared with $27.3 million, or 19 cents per share, in the fourth quarter of 2018.

Company revenues in the fourth quarter were $850.7 million, a 15.7% increase from $735 million for the same period in 2018.

Of that, Trinity's railcar leasing and management services segment saw revenue of $313.3 million in the fourth quarter, compared with $227.3 million in the prior-year period, and it experienced an operating profit margin of 42.2%. The company attributed the revenue growth to a higher volume of railcars sold from the lease fleet, growth in the lease fleet and higher average lease rates, which were partially offset by lower utilization and lower service-related fees compared with the fourth quarter of 2018.

Meanwhile, Trinity's rail products group reported quarterly revenues of $887.6 million, compared with $694.8 million in the prior-year period, with an operating profit margin of 11%. In the fourth quarter, Trinity saw higher railcar deliveries and experienced "favorable" railcar product mix changes compared with the same period in 2018.

Source: Trinity Industries

Trinity's wholly owned and partially owned lease fleet grew to 103,705 units in the fourth quarter, up from 99,215 for the same period in 2018, with a lease fleet utilization of 96% by the end of the fourth quarter, compared with 98.5% in the prior-year period.

Fourth-quarter expenses included a pretax restructuring charge of $14.7 million, or approximately 9 cents per diluted common share. Trinity attributed the charge to write-downs related to underutilized assets associated with its nonoperational facilities and employee transition costs. The company also saw a one-time, noncash deferred tax expense of $9.7 million, or 8 cents per common diluted share, with the expenses associated with a planned expansion of its maintenance service operations.

Trinity said 2019 marked its first year as a rail-focused company. In January, it named a new president and CEO, E. Jean Savage, who was already on Trinity's board and most recently served as vice president of the surface mining and technology division for construction equipment manufacturer Caterpillar (NYSE: CAT).

"While railcar industry fundamentals declined throughout the year as a result of uncertainty in trade policy and the North American industrial economy, Trinity's team delivered strong results in a very challenging market," said Melendy E. Lovett, chief financial officer. "Continued growth of our leased railcar portfolio, an emphasis on improving our lease rates while maintaining high utilization, and higher manufacturing railcar deliveries with a favorable product mix resulted in a 32% increase in full year operating profit year over year."

For 2020, Trinity projects full-year company revenues of $2.5 billion-$2.7 billion, compared with $3 billion in 2019. It estimates an adjusted diluted earnings per share from continuing operations of $1.15-$1.35, compared with $1.26 per adjusted earnings per share for 2019.

"The railcar industry is experiencing changing dynamics across the industrial end markets we serve, including increasing customer service expectations and the utilization of technology within supply chains," Savage said. "As a result of our rail-focused strategy, we have an opportunity to assess our business, evaluate our processes, and align our organization to deliver a premier experience for our customers based on their evolving business needs."

Trinity also said it is finalizing an assessment of the estimated useful lives and salvage value assumptions of the railcars in its leased railcar portfolio. The company expects a change in the weighted average useful life of railcars in its lease fleet to go to 37 years from 34 years, which could ultimately lower Trinity's annual depreciation expense in 2020 by $27 million-$33 million.

Image by Michael Gaida from Pixabay

 

Related Articles (CAT + TRN)

View Comments and Join the Discussion!

Posted-In: Freight Freightwaves LogisticsEarnings News Commodities Markets General