Headwinds put pressure on Trinity’s leasing rates

A photograph of two hopper cars for the railroad.

Rates to lease railcars will likely face continued headwinds throughout the year given the drop in railcar loadings, Trinity (NYSE: TRN) executives said during the company’s first-quarter earnings call Thursday.

“Right now, we’re focused more on utilization to the extent that railcars are needed,” said Eric Marchetto, chief financial officer for Trinity, a railcar manufacturer and lessor. If a customer doesn’t need the cars, then there might not be a rate that would maintain that leasing relationship, he said. U.S. carloads have fallen more than 10% year-to-date, with volume declines of 20% or greater in recent weeks because of the COVID-19 pandemic, according to the latest data from the Association of American Railroads.

Although the pandemic didn’t materially impact Trinity’s financial results for the first quarter of 2020, according to the company, Trinity is taking steps to lessen the pandemic’s blow on the second quarter and beyond, with a goal to preserve cash and further bolster liquidity. The company has eliminated nonessential expenditures and reduced its workforce to adjust for current operating conditions. 

Trinity “expects that the economic impacts of the COVID-19 pandemic will negatively impact our financial results in the near term,” Trinity said in a release. “Given the uncertainty in the market about the ultimate impact of COVID-19 on the North American economy, the company cannot reasonably estimate the likelihood of the financial impact on performance. Trinity is closely monitoring business conditions and will make appropriate adjustments to our operations and related financial scenarios as necessary.”

While Trinity’s first-tier suppliers, located primarily in North America, have yet to be significantly affected by changes in the supply chain flow originating in other countries, the company has contingency plans in place should there be any impacts to its second- and third-tier suppliers, said Trinity President and CEO E. Jean Savage during the company’ earnings call.

Trinity has “stress-tested” its business model through several economic scenarios, which takes into account data on railcar loadings, to ensure company liquidity and its ability to generate cash flow.

A slide from Trinity’s first-quarter 2020 earnings presentation outlines two possible scenarios the railcar manufacturer and lessor could face in the months ahead. Source: Trinity Industries

The company still plans to reduce costs by $25 million to $30 million in 2020 through efforts to reposition the company to focus on its rail assets. It has already cut costs by $9 million to $10 million as a result of some recent headcount reductions and realignment initiatives.

Trinity executives also reported that railcar sales are still ongoing, especially since some customers are taking advantage of the current market to secure new railcars for long-term use. But the option of selling assets is still a “lever” that Trinity could pull if needed since Trinity has a large, unencumbered lease fleet, according to Marchetto.

“Replacement demand is the single largest driver” for customers seeking new railcars, Marchetto said.

First-quarter financials

Trinity’s net income from continuing operations in the first quarter of 2020 was $162 million, or $1.33 per common diluted share, compared with almost $31 million, or 23 cents per common diluted share in the first quarter of 2019.

The difference between the two quarters was related to several factors, including a tax benefit of nearly $155 million under the CARES Act and a pretax restructuring charge of $5.5 million. Excluding these factors, earnings per common diluted share were down by 11 cents on an adjusted basis, Trinity said.

First-quarter revenue was $615 million, compared with nearly $605 million in the year-ago period on a higher volume of railcars sold from Trinity’s lease fleet. Operating costs were also higher, at $542 million versus $513 million. Operating profit in the first quarter was $73 million versus $92 million a year ago.

Trinity’s railcar leasing segment saw first-quarter revenue grow to $236 million from $200 million. Trinity attributed the growth to a higher volume of railcars sold from the lease fleet, growth in the lease fleet and higher average lease rates. Its fleet also grew 2.8% to 103,815 units in the first quarter.

Meanwhile, Trinity’s rail products group segment’s revenue fell to $509 million from $628 million on lower railcar deliveries and what Trinity calls “operational inefficiencies related to reduced production volumes.” Trinity said it received orders for 1,970 railcars, with a value of $227.5 million, and delivered 3,705 railcars during the first quarter of 2020. In comparison, first-quarter 2019 orders were for 3,000 railcars while deliveries stood at 4,505 railcars.

A change in a customer’s underlying financial condition reduced the rail products group segment’s backlog by 540 railcars, which in turn helped remove some of Trinity’s exposure to the declining markets for crude oil and frac sand.

Trinity’s first-quarter railcar backlog was valued at $1.6 billion, representing 12,810 railcars, compared with a backlog worth $1.8 billion and 15,085 railcars in the first quarter of 2019.