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Trinity Industries Inc (TRN) Q1 2019 Earnings Call Transcript

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Trinity Industries Inc  (NYSE: TRN)
Q1 2019 Earnings Call
April 25, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 performances. 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 could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.

Good day, and welcome to the First Quarter Results Conference Call. Currently all phone lines are in a listen-only mode. Later there'll be an opportunity to ask questions during a question-and-answer session. (Operator Instructions) Please be advised today's program may be recorded.

It is now my pleasure to turn the program over to Ms. Jessica Greiner; Vice President of Investor Relations and Communications. You may begin.

Jessica Greiner -- Vice President, Investor Relations and Communications

Thank you, Aaron, and good morning everyone. Thank you for joining us today. I'm Jessica Greiner; Vice President of Investor Relations and Communications. We welcome you to Trinity Industry's first quarter 2019 results conference call. Trinity has now completed its fiscal quarter of operations as a leading provider of Railcar products and services in the North American market. We are pleased to share some highlights with you today.

We will begin our earnings conference call with our prepared remarks from Tim Wallace; Chief Executive Officer and President at Trinity, followed by Eric Marchetto; Senior Vice President and Group President at TrinityRail, Melendy Lovett; Senior Vice President and Chief Financial Officer will provide the financial highlights and outlook. Following the prepared remarks from the leadership team we will move to the Q&A session. Brian Madison; President at Trinity Leasing and Management services and Paul Mauer President at TrinityRail Products are also in the room with us today and will be part of the Q&A session. Sarah Teachout; Senior Vice President and Chief Legal Officer and Steve McDowell, Vice President and Chief Accounting Officer are also in the room with us today.

It is now my pleasure to turn the call over to Tim.

Timothy R. Wallace -- Chairman, President and Chief Executive Officer

Thank you, Jessica, and good morning everyone. I'm pleased with how our organization has come together and is performing at a high level as the new Trinity. We have a number of seasoned people and new executive roles and they are providing significant value to our organization. I'm pleased with everything we have accomplished during the first six months as a new company following the Spin-off of Arcosa. I have a high degree of confidence in our organization.

We're making good progress in respect to optimizing our balance sheet. During the early part of April, we completed a successful $528 million leased railcar financing at a very competitive coupon rate of 3.82%. Our capital markets and Treasury teams did an excellent job of executing this financing. Melendy will provide more details in her remarks. We have also made progress returning capital to our shareholders. Last November, we announced $350 million accelerated share repurchase program that was completed in the first quarter, following its completion our Board approved another $350 million share repurchase authorization as well as a 31% increase in the company's quarterly dividend.

Our commitment to returning capital shareholders through dividends and share repurchase continues to be a priority for us. Our businesses got off to a good start in the first quarter improving our year-over-year EPS and quarterly revenue growth. Our leasing business has a positive momentum it maintained a high level of lease fleet utilization and increased its operating margin during the quarter. Our wholly and partially owned lease fleet grew by 9% during the past year. Our real products team changed over a number of production lines while delivering a higher operating margin relative to the previous quarter.

Our highway products business had a good first quarter despite a number of severe weather related events that affected the timing of several highway construction projects. As we enter the second quarter, the general sense of economic uncertainty that affected many of our commercial markets at the start of the year appears to be diminishing. Overall, we expect 2019 to be a strong year for us in respect to earnings growth. We remain on track to increase our earnings in excess of 60% year-over-year for 2019.

Our vision for TrinityRail is to be a premier provider a railcar products and services in North America while generating high quality earnings and returns for shareholders. Today we have an impressive platform that provides a host of offerings to our customers across the railcar equipment ecosphere. The strength and breadth of TrinityRail's platform provides an excellent foundation for us to continually pursue our journey of being a premier provider of railcar products and services. The integration of our manufacturing leasing and management services businesses generate a number of tangible and intangible benefits for our Company. Our manufacturing business is a highly reliable and timely source of high quality railcars for our leasing business.

TrinityRail's design engineers strive to develop innovative features that can be launched through our lease fleet improving the usage and productivity of railcars for customers. Our leasing business also provides us regular opportunities to engage with our customers and links us with our products throughout their lifecycle. These touch points create a direct feedback loop that generates information and data to help us continuously refine, innovate and improve our railcar products and services. From a financial point of view, we especially value the recurring revenues and predictable cash flows generated by our leasing and management services businesses.

Longer term, we expect to continue to advance further into the railcar value stream, enhancing our customer relationships and developing additional diverse sources of recurring revenue with predictable cash flows. We plan to accomplish this by doubling the size of our lease fleet, leveraging technology and innovation and expanding our platform of railcar products and services to provide valuable business solutions to our customers. Ultimately, we envision our railcar platform as the go to source for companies that value the associated benefits of optimized railcar ownership and usage. We want them to view TrinityRail as a trusted partner who can help facilitate the rail delivery of their bulk goods in a seamless and cost effective manner.

Shippers of both goods have alternatives for transporting their products. We want shippers to select railcars as their preferred shipment mode. Longer term initiatives designed to optimize the railcar industry eco share including Precision Scheduled Railroading should have a positive effect on the modal share of rail in North America. Increasing rails modal share generates opportunities for our Company that translate into value for our shareholders. We believe TrinityRail can fill a significant role by harnessing the power of the integrated rail platform to optimize the ownership and usage of railcars for our customers. This is a very exciting and transformational opportunity for our Company and potentially a significant shift for the rail industry in general.

As we work in achieving our vision, we remain highly focused on deploying our capital with the expectations of (inaudible) value to our shareholders through high returns on our investments. In particular we're looking for opportunities to develop additional sources of recurring revenues within the railcar ecosphere that provide predictable levels of earnings, cash flow and stable returns. Six months ago, we completed our spin-off so we could focus on our integrated platform of railcar products and services.

We have established a strong, fresh leadership team and a highly motivated organization that is dedicated to driving value to our customers and our shareholders. At the beginning of my remarks, I mentioned how well our organization is performing and the high degree of confidence I have in our Company. In my experience when we set our minds on accomplishing something we deliver, I look forward to sharing progress with you as we continue on our journey.

Now I'll turn it over to Eric to discuss further details on operations of our business and commercial markets.

Eric R. Marchetto -- Senior Vice President at Trinity Rails

Thank you, Tim, and good morning everyone. I'm very pleased with the performance the TrinityRail team delivered during the quarter. This has started our year with positive momentum. The team achieved improved pricing and operational efficiencies which yielded higher quarter-over-quarter operating segment margins for both the leasing company and a manufacturing business. As Tim mentioned, the general sense of economic uncertainty prevalent in our commercial markets earlier this year has begun to clear an encouraging indicator of the overall health of the business environment.

Severe weather negatively impacted railcar loadings during the first quarter and lasting infrastructure damage continues to hinder rail traffic in some parts of North America. Nevertheless inquiry levels continue at a good pace in terms of number of railcars and number of quotations. We expect railcar loadings to recover in the coming months. We believe the various geopolitical events, macro economic concerns and the effects of the Federal Government shutdown all of which clouded the market outlook earlier in the year are now having less of an impact on our customers shipping and railcar sourcing decisions.

To TrinityRail, commercial and portfolio teams delivered a solid first quarter to start the year, maintaining lease utilization at a healthy level of 98.4% and achieving renewal success in line with our historical averages. Our railcar lease rates for new originations, assignments and renewals and pricing for new equipment purchases exceeded our expectations. As a result, we continue to forecast our average lease rate for the wholly and partially owned railcar portfolio will improve year-over-year.

During the first quarter TrinityRail received orders for 3,000 railcars across a broad range of railcar types. This brings our backlog to 26,320 railcars with a value of $3.3 billion. We expect to deliver approximately 60% of the backlog units throughout the remainder of 2019. Those units account for approximately 83% of the midpoint of our annual unit guidance. As reflected in our quarter-end report, we remove 3,050 small cube covered hoppers from our backlog with a value of $240 million. These railcars were committed to a fracs end (ph) customer for our lease fleet for delivery in 2020 and beyond.

The economics of this termination are still under negotiation with lessee. This car type now represents approximately 1% of our remaining backlog. TrinityRail Leasing and Management Services continue to make progress on our objective to grow the lease fleet. During the first quarter, our owned partially owned and managed lease fleet grew to over 122,700 railcars principally through captive originations. Over the years, we are consistently proven to be the leader in new railcar lease originations. The tangible and intangible benefits of sourcing new railcars from our rail products business are significant factors in enhancing shareholder value through the integrated rail platform.

Commercially, it allows us to capitalize on market opportunities by rapidly deploying existing assets to emerging opportunities. While augmenting our fleet in direct alignment with demand when customer needs surpassed the existing railcar supply. Financially our lower cost base of the asset was reflecting the equipment value on our balance sheet, thus enhancing earnings and returns for shareholders throughout the life of the railcar.

The TrinityRail products team also delivered a solid quarter. In the first three months of the year the team delivered 4,505 new railcars across a broad array of product types as a result of several successful line changeovers. The rail products group achieved an operating margin of 8.4%, an improvement from 6.3% in the fourth quarter of 2018. The improvement in margin was primarily due to favorable railcar product mix, improved pricing of railcars delivered from the backlog and growth in the railcar maintenance services business.

We expect operating profit will improve through the year as we gained operating leverage with increasing volumes. We are focused on investing and the differentiation of our integrated platforms products and services. As a leading railcar owner, railcar manufacturer, an experienced railcar services provider the breadth and depth of our integrated platform is unmatched in the industry. Our multifaceted relationships with North American rail shippers, railroads and lessors provide the organization with unique insights into rail shippers needs and performance of railcars in the field. This constant flow of information creates an invaluable feedback loop and we have initiatives under way across our platform to leverage this feedback to improve our products and services and deliver greater value to our customers.

In our leasing organization, I'm particularly proud to highlight -- increasingly impactful efforts to build scale through digital transformation and continuous improvement of our operational processes. Investments and relationship management tools and process improvements, data and analytics and developing our people all done with an intense focus on delivering an outstanding customer experience. These efforts are paying off. In our products organization, we've realize the early success of several new railcar types that we highlighted on our fourth quarter conference call including refrigerated boxcars, mill gondolas, our innovative hourglass autorack and an intermodal railcar. Collectively these new products are expected to contribute approximately $250 million of these segments gross revenues in 2019.

I expect demand for these products continue in the years to come. TrinityRail continues to invest in product development efforts to convert our unique market view into better products that create more value for rail shippers and drive greater efficiency in the rail ecosphere. We also continue to invest resources and our maintenance services business as part of our strategic initiatives. This business has experienced year-over-year organic growth of more than 50% in quarterly revenues led by the growth of railcar modifications and our autorack service center.

Our team is making great strides toward increasing our capacity in our existing maintenance facilities to accommodate more railcars as well as identifying plans to expand our geographic presence for better and faster service of our lease fleet. We view our maintenance services business as an important differentiator for our platform.

In closing, we are highly focused on operational execution and increasing the value proposition to our customers by offering differentiated products and services. We will continue to invest in the business that will drive our performance in the future. The TrinityRail integrated platform is built to deliver for all of our stakeholders, ultimately creating value for our customers, our employees and our shareholders.

I'll now turn over to Melendy to discuss the financial guidance and update on our strategic financial objectives.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Thank you, Eric, and good morning everyone. Yesterday following market closed the Company reported first quarter revenues of $605 million and earnings per share from continuing operations of $0.24. The earnings improvement resulted in a 167% increase year-over-year and a 26% increase quarter-over-quarter. I echo Tim's and Eric's regard and praised for the teams outstanding performance and strong start for the year. Following this conference call, we will file our quarterly 10-Q with additional information on our financial results.

As you all heard from Tim and Eric, we are excited about the positive fundamentals and the opportunities we see in our end markets and our rail businesses. Our capital allocation plans and approach remain consistent with our communications following the spin-off. Investing in value creating business opportunities that transformatively grow the lease fleet and build out our commercial fleet services as well as enhance our manufacturing and maintenance footprint are important elements of our growth strategy and capital allocation plan.

Other important elements of our capital allocation approach are to improve returns and return capital to shareholders. We're making progress and accomplishing these goals through optimizing the Company's capital structure and opportunistically leveraging the balance sheet to finance our investments. During the first quarter, we made a net investment of $465 million in our owned leased fleet. Approximately half of this investment was in new railcars for manufacturing while the remainder was primarily the exercise of the sale leaseback early purchase option we disclosed in February.

We also built up inventory in preparation for our planned production ramp up and build out of capacity. We expect inventory to decline through the balance of the year. As expected Trinity completed the previously announced $350 million accelerated share repurchase program during the first quarter of which $70 million was settled in March. Total share repurchases during the first quarter amounted to $89 million which included $19 million that was executed under the company's newly approved $350 million share repurchase authorization that expires in December of 2020. We will disclose future share repurchase activity as we report each quarter's financial results. We were also pleased to announce during the first quarter a 31% increase to our quarterly dividend which will be paid to shareholders at the end of April. At the time of the announcement, the dividend increase raised our dividend yield to approximately 3%. Collectively, the dividend and share repurchase program reflect our commitment to returning capital to shareholders. These actions are supported by our financial strength and the confidence we have in our integrated platform of rail products and services.

As a result of the investments made across our businesses in the first quarter our quarter-ending balance of cash and cash equivalents was approximately $74 million. Subsequent to quarter-end Trinity successfully closed on the $528 million railcar asset-backed securitization TRL 2019. This ABS is secured by a portfolio of $660 million of railcars and their associated leases and as single A rated by the reviewing credit rating agencies. We are extremely pleased with the level of interest from the investment community for this debt offering and the pricing at a 3.82% coupon rate.

We continue to believe the debt markets appreciating value Trinity's ability to operate and service high performing portfolios of railcar assets through our unique integrated rail platform. On a pro forma basis, this securitization brings our wholly owned lease fleet leverage ratio to 50% as of the end of the first quarter in line with our target of 57% to 59% for the year. And it brings our corporate cash balance to approximately $130 million in line with our target of $100 million to $200 million. We still anticipate significant new railcar additions to our wholly owned leased fleet during 2019 and we expect to finance this growth with appropriate leverage. We're making good progress to lower our overall cost of capital and align the capital structure of the lease fleet to an optimized level more typical for our leasing Company.

Moving now to guidance, in yesterday's press release Trinity reiterated annual earnings per share guidance from continuing operations of $1.15 to $1.35 for 2019, resulting in growth of 64% to 93% year-over-year. We continue to expect profit from continuing operations to increase throughout the year as we add railcars to our lease fleet, ramp up railcar unit deliveries and begin delivering railcars from the manufacturing backlog that were priced in more recent market conditions.

The timing of railcar sales from the lease fleet is difficult to predict and incorporates considerations in working with our investment partners and analyzing other secondary market factors. We now expect the majority of our railcar sales from the lease fleet to occur in the second half of 2019. While our earnings guidance for the Company did not change there were slight adjustments to the business and the corporate forecast. We now expect slightly higher revenues from operations in the Railcar Leasing and Management Services Group between $775 million and $790 million and operating profit between $320 million and $330 million in 2019.

The improvement in revenue and profit is mainly attributable to growth in the lease fleet and modestly improving average lease rates. Our expectations for proceeds from sales of lease railcars from the lease fleet to RIV partners and the secondary market remains the same at $350 million. Leaving a little over $300 million to complete through the balance of the year. Certain of the proceeds will be included in segment revenue once the determination of assets is finalized. As a reminder, in our earnings guidance, we had leases with the purchase option referred to a sales type leases for accounting purposes. We're required to account for these as sales for the lease accounting rules and we expect this to add an additional $160 million in revenue. The gain on all of these sales transactions will be attributed to the total leasing segment profit and our EPS guidance range incorporates these assumptions.

Moving to the rail products group. We continue to expect revenue and operating profit to be $3.1 billion to $3.3 billion with a 9% to 9.5% operating margin. This includes railcar delivery units of 23,500 to 25,500 railcars. Our rail products group margin reflects improving manufacturing efficiencies with higher unit deliveries and broad demand for our products across end markets. We have slightly lowered our corporate expenses guidance range to $110 million to $120 million as a result of progress we're making in our cost optimization efforts and favorable recoveries during the quarter. Our guidance includes elevated litigation related expenses continuing through the year as we work to close out the follow on lawsuits resulting from the Federal qui tam litigation. As a reminder our guidance for corporate expenses also includes transition and stranded costs related to the spin-off in separation of Arcosa. We're working diligently to ensure that our corporate expenses are aligned with Trinity's go-forward business model, we'll continue to update you on our cost optimization progress and future earnings call.

Regarding revenue and profit eliminations given orders received during the quarter and ongoing visibility to leasing customers railcar equipment needs. We now forecast Rail Group revenue eliminations of $1.5 billion and profit eliminations of $175 million. As a reminder, the revenue and profit associated with these investments reflects the market based transfer pricing for intercompany transactions between our railcar leasing and products business segments. Regarding our net lease fleet investment, considering the additional railcars we expect to add to the lease fleet and the anticipated proceeds from the secondary market sales and purchases. we expect total net lease fleet investment to remain at $1.2 billion to $1.4 billion for 2019.

In addition to our planned leasing capital expenditures, our manufacturing and corporate capital expenditures forecast remains at $90 million to $110 million, primarily made up of facility expansions and improvements to meet our product delivery commitments. As part of our plan to improve our financial performance. Our objective is to narrow the variability of Trinity's earnings and returns from year-to-year as we drive our returns higher through the railcar cycle. Our goals for 2019 are focused short term on improving earnings and focused long term on improving return-on-equity and relative total shareholder return. The Board and Management have aligned our Incentive Plans with these goals and we believe these goals are well aligned with investor expectations.

Making progress on these goals, we aim to stabilize and improve our return results generating even more value for our shareholders. In closing, the investments we are making in our businesses initiatives to optimize our capital structure and our efforts to improve returns are all aligned with our objective of driving value to shareholders over the long term. Our capital structure and financial approach are aimed at moving Trinity in the direction of being valued by Investors and the Capital Markets as more of a leasing company. Together, the leadership team and I are very excited about our potential for growth and improving returns . And we look forward to sharing our progress with you along the way.

We'll now transition into the Q&A session. Operator will you please give our listeners the instructions.

Questions and Answers:

Operator

(Operator Instructions) And we will take our first question from Allison Poliniak with Wells Fargo. Your line is open.

Allison Poliniak -- Wells Fargo -- Analyst

Hi guys. Good morning.

Paul M. Mauer -- President-TrinityRail Products

Good Morning.

Allison Poliniak -- Wells Fargo -- Analyst

Just going to -- I guess the customer the removal of those cars you talked about it being a leasing customer. I guess one question are they in existing leasing customer today and is there any impact to the current lease fleet as a result of this customer?

Eric R. Marchetto -- Senior Vice President at Trinity Rails

Hi, Allison, this is Eric Marchetto, I answer that. The customer that we discussed, yes they are current customer as we will say in our 10-Q is a release earlier or later today we do not anticipate that to have an impact on our earnings for the year with the existing cars that we have in our fleet.

Allison Poliniak -- Wells Fargo -- Analyst

Got it. Thanks. And then on the Rail Products Group margin obviously a lot of line changeovers setting up for production this year? How should we think of the cadence of that margin improvement, I'm assuming those are behind you is it a step up and it's stable from there? Or is it sort of a slow trend up for the year?

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Good morning, Allison. This is Melendy, how are you?

Allison Poliniak -- Wells Fargo -- Analyst

Good.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

So you saw our reported margin for the quarter and then our guidance is 9% to 9.5% for the year. And we see that improving over the quarters as we get more leverage from our long production runs.

Allison Poliniak -- Wells Fargo -- Analyst

Okay. Thank you.

Operator

And we can take our next question from Justin Long with Stephens. Your line is open.

Justin Long -- Stephens -- Analyst

Thanks and good morning. So maybe the start, I wanted to ask about the expected quarterly cadence of railcar production over the remainder of this year and with some of your peak manufacturing capacity going away with Arcosa as part of that's been. Can you also talk about how much Capital you're investing in 2019 to reposition your lines and increase capacity in order to meet the delivery schedule in your backlog?

Eric R. Marchetto -- Senior Vice President at Trinity Rails

So, Justin, this is Eric, I'll start and then we can -- I'm sure we can all chime in. So our, if I understand your question the ramp of delivery units will be throughout the year in terms of what we're expecting. When you talk about what we lost with Arcosa, I would push back on that a little bit, I don't think we really lost much of our manufacturing flexibility and certain not any of our capacity with the spin. We retained many of the assets that in our footprint. We continue to invest in our existing footprint to increase our flexibility in order to respond, Paul, you want to add anything to that.

Paul M. Mauer -- President-TrinityRail Products

This is Paul, just a little bit more color, you mentioned $30 million of investment we were putting in place this year in a large part of that is to increase our flexibility within our existing shops and the way to think of it as we're going to do more with less facilities.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

And Justin, this is Melendy. As far as the buildout of our CapEx. Our overall guidance is the $90 million to $110 million and that also builds fairly normally through the quarters along with our production plans.

Justin Long -- Stephens -- Analyst

Okay. That's helpful. And secondly, we've gotten more details around the lease fleet and that's really helpful and I wanted to ask about the return profile, so last year excluding gains on sale the ROE was around 4%, Melendy you mentioned one of the long term goals is improving returns, but can you help us understand what you view as a reasonable target for ROE for the lease fleet and share any thoughts around the timing of getting returns to a level that exceeds your cost of capital?

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Certainly. So as you mentioned we shared where our ROE yesterday for the lease fleet in our investor materials that we shared in March, and that's kind of in the mid-to-high-single digit range. I mentioned in my comments that return-on-equity and improving return-on-equity is a key goal for us over the long term. And when we were setting our goals in that area we studied the history of Trinity post-spin and we compared our performance to our industry peers as well as a broader comparator group and over a five to seven year cycle our historical ROE performance was in the mid-to-high teens. So our goal Justin, it aims to move our returns to that mid-to-high teens level it's going to take us some time to do that, but our goal is to deliver returns above industry or comparator averages you know that, that address your question in terms of exceeding cost of capital our returns on capital exceeding cost of capital and our returns on equity exceeding our cost of equity.

Justin Long -- Stephens -- Analyst

Okay. Great. That's helpful. I appreciate the time.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Thank you.

Operator

And we will take our next question from Matt Brooklier with Buckingham Research. Your line is now open.

Matthew Brooklier -- Buckingham Research Group -- Analyst

Hi, thanks and good morning. I wanted to get a sense for you know overall orders and just demand you know post first quarter closing it sounds like the environment has improved it's picked up a little bit you know post kind of a slow or maybe disappointing first quarter, but you know I'm trying to gauge you know if that is true the markets improved and you know if you could provide any color in terms of kind of quantify you know orders or inquiries post you know first quarter in closing?

Eric R. Marchetto -- Senior Vice President at Trinity Rails

Sure. Matt, this is Eric. Let me start with -- as I mentioned in my prepared remarks we are seeing the inquiry levels both the number of units and the number of actual inquiries, then I'd characterized as good we did get off to a slow start in my opinion which was reflected in our comments in February, and mentioned all the reasons why I think what attributed to that slow start. We have seen the cadence pick up which gives us a high degree of confidence in what we're guiding for the year in terms of deliveries and what we're expecting in terms of lease rates.

I'll just go into a little more color on the first quarter. First quarter order activity was probably a little less than some may have expected and I think that's generally a reflection of you know we have a broad view we participated we saw a lot of market opportunities and I would say that we raised our railcar pricing a little bit faster than some others may have done in the market and a result we didn't get as many of the deals as we would bid on. And I think that will catch up as we go through the year.

Matthew Brooklier -- Buckingham Research Group -- Analyst

Definitely helpful. And then, I think last quarter you talked to PSR initiatives at the Class 1 railroads you know we talked about I guess the bad right in the near term, but they also there being potential for good to come out of it for Trinity maybe you can provide us a little bit of an update in terms of how you're thinking about PSR some of those -- some of the railcars that have been night older you know put back to shippers? Or is there still the possibility that those cars could find their way into either your owned or your management lease fleet?

Eric R. Marchetto -- Senior Vice President at Trinity Rails

So this is Eric again. A lot there, so in terms of PSR, I think in the quarter as we've gone through the discussion that has dissipated a little bit in terms of the impact and it's probably been offset by the -- what's happened in the weather in the market that's probably had a greater impact on our shippers business than PSR. As we go forward as Tim said, we think PSR we're all -- we're for all things that increase the efficiency and the competitiveness of rail transportation. So from that standpoint, we think long term it's healthy.

We do think there will be opportunities for railcars and for the shifting of ownership as the burden of providing railcars may change when you get into the cars and storage the AAR puts out a measure on railcars and storage that's the best measure that we have in the industry. It's just not a great measure. And so, but it's what we have we study that a lot, we have seen I believe there's a lot of rotation in that number month-to-month. In other words there's cars that come in and out of those numbers in the details and the aggregate number may not change a lot. I'll give you an example of that -- cars and shop generally cars that are going into maintenance facilities today for compliance or change of service or anything would end up showing up in that idle fleet count, AR statistics.

I don't believe, I wouldn't view those cars as idle personally, but they certainly do show up in those numbers. As we studied the fleet and the idle fleet and we look out we've studied historically and look forward. I believe that a good portion of those cars are in and out of storage when get into how many of those are in long term storage say greater than a year, I think it's a fraction of that total fleet. That's a long answer to your question. I hope that's helpful.

Matthew Brooklier -- Buckingham Research Group -- Analyst

I appreciate the long answer and the details and also appreciate the time. Thank you.

Operator

And we will take our next question from Gordon Johnson with Vertical Group. Your line is open.

Gordon Johnson -- Vertical Group -- Analyst

Hey guys, thanks for taking the questions.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Good morning.

Gordon Johnson -- Vertical Group -- Analyst

Good morning, with respect to I guess the removal of cars that you guys announced yesterday. I understand that it may not have an impact or is it going to have an impact on earnings this year, but could it potentially have an impact on earnings next year?

Eric R. Marchetto -- Senior Vice President at Trinity Rails

Gordon, this is Eric. I'll answer that, so certainly our backlog we expect to realize value and everything that's in our backlog. And as we said we didn't expect that those cars to deliver this year therefore it didn't have an impact, certainly going forward we made the determination that we are going to get more value by taking it out of the backlog now then leaving the backlog and delivering those cars trying to lease into our fleet. So certainly as cars coming in our backlog that can have an impact long term, but we have plenty of time to react to that and to plan accordingly and to fill our production capacity as necessary.

Gordon Johnson -- Vertical Group -- Analyst

Okay. That's very helpful. And then with respect to orders I guess just that maybe you guys don't give quarterly guidance or maybe you want to talk about it, but. Are you guys seeing anything right now that would suggest that you're going to see a big uptick in orders near-term maybe even in the second quarter?

Eric R. Marchetto -- Senior Vice President at Trinity Rails

This is Eric again. I don't -- you know when you look at orders are not being there, would you just look at the industry numbers in the fourth quarter we did 20,000 railcars which I think most would characterize as good. This quarter we did 10,000 which people will find disappointed in that when you average them together it's not bad and I think order activity we don't predict the order activity by quarterly basis, but when you -- as we look out through the year I would expect order activity to end up being good whether it's second quarter, third quarter or fourth quarter in the end I think we expected to be a healthy environment.

Gordon Johnson -- Vertical Group -- Analyst

Helpful. And then last question. Just looking at loading ex coal, we noticed just on a weekly basis for the last 11 weeks the number has been negative, it got better recently, but is there anything that you guys see that would suggest or help explain that weakness in loadings that we've seen recently and clearly I would assume you guys expect it to get better going forward. Thanks a lot for the questions guys.

Eric R. Marchetto -- Senior Vice President at Trinity Rails

Hi, Gordon, this is Eric. I'll answer that, and as I mentioned some of this in my prepared remarks, we do think weather had a dramatic impact on railcar loadings, weather doesn't have a direct impact on our business, but it certainly has an impact on our industry. So I think that has a big piece of it when you do look at the railcar loadings there most of the car types are down you know the bright spot has been crude oil and particularly in products, what's going on there. But generally speaking, I think weather is the bigger impact and demand for the output on railcar loadings.

Matthew Brooklier -- Buckingham Research Group -- Analyst

Thanks again guys.

Operator

And we will take our next question from Matt Elkott with Cowen. Your line is now open.

Matt Elkott -- Cowen -- Analyst

Good morning. Thank you for taking my question. You guys made some commentary about positive market lease rates. Did you actually see a sequential improvement in spot rates from Q4 to Q1? Or did this positive momentum happen after the close of the quarter?

Eric R. Marchetto -- Senior Vice President at Trinity Rails

Matt, this is Eric. So when you talk about sequential improvement on lease rates the answer in the quarter we did see sequential improvement on lease rates in many of our car types, when I say many of our car types we're tracking dozens of car types that would include both tank cars and FreightCars and kind of across the board we're seeing increases sequentially. And I've talked about that in the last couple of quarters that sequentially we continue to see lease rates improving. One of the brightest spots has been in the coal market. We've seen lease rates with you know three digit increases where a year ago those lease rates were very, very low and today they're getting and they're not quite good, but there's certainly a lot better. And to put it an example $350 million to low $400 million in terms of lease rates. So we have seen increases not just in the tank car side on the FreightCar side as well. And I extend -- I would extend that to look at the specialty covered hoppers and some the specialty FreightCar types where we have seen continual improvement in pricing.

Matt Elkott -- Cowen -- Analyst

Very helpful. And my next question is on the mix of deliveries going forward are should we expect a higher percentage of tank cars aggressively as we move throughout the year?

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Matt, this is Melendy. In our February call we did share that the mix shift from freight over to tank as we move through the year and that remains that what we're seeing now is consistent with that guidance that we gave in February.

Matt Elkott -- Cowen -- Analyst

Okay. And just one last question. Your backlog ASP went up. How much of that was attributable to the removal of the frac sand cars and how much of it may be pricing or new orders?

Eric R. Marchetto -- Senior Vice President at Trinity Rails

I would say when you look at the change quarter-over-quarter, because we had 3,000 railcars ordered and removed over 3,000 cars it's a combination of both, but the impact of the small cube covered hoppers those are definitely had a lower ASP and so they had a -- those would have had a larger impact in the order activity.

Matt Elkott -- Cowen -- Analyst

Great. Thank you very much.

Eric R. Marchetto -- Senior Vice President at Trinity Rails

You're welcome.

Operator

And we will take our next question from Steve Barger with KeyBanc Capital Markets. Your line is now open.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Thanks. Good morning, everyone.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Good morning.

Eric R. Marchetto -- Senior Vice President at Trinity Rails

Good morning.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Eric, I get that orders of volatile quarter-to-quarter, but if we don't see booking activity pick up will you hold that price discipline or you're above market stance that you had in 1Q? Or will you adjust to the environment to get back to historical share?

Eric R. Marchetto -- Senior Vice President at Trinity Rails

Yeah, we're going to be Steve we're always responsive to pricing and I wouldn't say -- you know I would say pricing there's a wide band on pricing in the pricing environment, I wouldn't say necessarily we are above market. I would say that -- it only takes one to be lower so from that standpoint there were some opportunities in the quarter that we participated and that we did not the customers went different directions and I'd say they went different directions based on price. But I wouldn't say that we're above market and our pricing expectations, I do think there is inflationary pressures on railcar pricing and I would expect that to continue.

Steve Barger -- KeyBanc Capital Markets -- Analyst

So, your pricing to your assumed margin profile rather than any kind of share thought (ph)?

Eric R. Marchetto -- Senior Vice President at Trinity Rails

That we -- we did not handle, we've said this for years, I guess I've never said that -- we do -- we don't run our business on market share and especially as we -- as our lease fleet has grown having a 120,000 railcar lease fleet it's important that we have pricing discipline and we cannot have -- we cannot let the marginal new car deal impact the lease fleet.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yeah, understood. And actually that's a great segway. Melendy, thinking about your comments on narrowing the variability of earnings does that mean if the OEM cycle rolls over you'll accelerate growth in the lease fleet? Or how can you reduce variability understanding the cyclicality of manufacturing ?

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Yeah. Thanks, Steve. The way that we're thinking about that is over the long term and through the railcar cycle certainly the manufacturing side of our business will continue to be cyclical. So the way we're thinking about that is we've talked about transformatively growing the lease fleet and Tim mentioned doubling the lease fleet while making our earnings and returns more steady and more predictable. So it's more of a long term expectation that as we dramatically increase the size of the lease fleet that will therefore provide steady earnings and returns with our manufacturing business as kind of a upside when the cycle is strong.

Steve Barger -- KeyBanc Capital Markets -- Analyst

So, if we do get into a softer order environment I guess going back to Eric's point about the marginal buyer setting price. How do you grow the lease fleet in that environment when presumably the OE market would be softer because of economic conditions which would certainly affect the leasing market?

Eric R. Marchetto -- Senior Vice President at Trinity Rails

Well, certainly our historically our lease fleet growth has been principally through organic lease fleet originations, although when we talked about in our Investor Day presentation last year and as we demonstrated over the last few years we are active participants in the secondary market and so we're always looking at what's the right mix of buying railcars in the secondary market versus organically originating the deals and likewise when we look at what assets we're going to sell out of our portfolio we're looking at where are the right value creation opportunities. So, I don't think that changes. I would probably haven't been given enough credit for that discipline, but that's certainly our approach.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

And I would just add to that as Eric mentioned that, you know the down part of the cycle whether that's in manufacturing or in leasing historically has been a good opportunity for Trinity to take a contrarian position and buy at a really attractive valuation.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Very good. Thank you.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Thank you.

Operator

And we will take our next question from Mike Baudendistel with Stifel. Your line is open.

Mike Baudendistel -- Stifel, Nicolaus & Company -- Analyst

Thank you. Just want to make sure I understand all the impacts that on the Rail Group margins from the 8.5% this quarter to 9.5% for the year, so it's, the mix shift toward tanks you know greater volume, and I guess you got some changeovers, is there's anything else that I'm sort of leaving out there?

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Those are the main drivers is the mix change as we mentioned from freight over to tank and then as we ramp up our production runs we're able to create more leverage.

Eric R. Marchetto -- Senior Vice President at Trinity Rails

There's probably a little bit of pricing improvement as we go through the year.

Mike Baudendistel -- Stifel, Nicolaus & Company -- Analyst

Got it. That's helpful. And then just want to ask you, is the Greenbrier, ARI combination you think that's going to have an impact on pricing in the industry and do you compete you know with both of them you know one more than the other or just how often do you see sort of both of them together competing for business that you're also competing with them in the marketplace?

Timothy R. Wallace -- Chairman, President and Chief Executive Officer

Okay. This is Tim. We've competed against both companies for decades, we're very close to reaching a contract terms with to acquire ARI over 20 years ago and we just weren't able to reach an agreement with them. And I've admired and respected ARI for a good while and Greenbrier an aggressive -- impressive company and I appreciate their interest in ARI. But my early view is that it really does not change or affect our situation in any way. I really don't have anything else to comment on that subject.

Mike Baudendistel -- Stifel, Nicolaus & Company -- Analyst

Got it. Thank you. That's all -- go ahead.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

But I would add Mike is that, you know I feel like the transaction announcement really supports attractive valuations and long term value appreciation for railcar products and services businesses. So and this underscores our belief that Trinity is undervalued. So it's nice to see these industry transactions really have the attractive -- the attractive valuation from that perspective.

Mike Baudendistel -- Stifel, Nicolaus & Company -- Analyst

Understood. Thank you.

Operator

And we will take our final question from Bascome Majors with Susquehanna. Your line is now open.

Bascome Majors -- Susquehanna -- Analyst

Yeah, Melendy, I appreciate your sharing, your view to take the Company's returns on equity from call it you know mid-to-high single digits to mid-to-high teens over the cycle. And you've talked a lot about ways to do that. Can you maybe rank order the things in kind of the timeline over them to how we get from point A to point B. I mean clearly you're adding leverage, you just got a good chunk of permanent debt at a pretty attractive fixed price. But you know kind of how that fits into the other things you can do and maybe just a generally better renewal environment you know taking all that detail. Thank you.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Good morning, Bascome, I'm glad that you -- I remembered your question from February and I'm glad that you noticed that I did my best to answer it. Certainly return on equity improvement, you know we're thinking about it in front from all of the different aspects of doing it. So we're looking at of course what can we do to improve our our profit margin. What can we do to improve our asset efficiency. And then as you mentioned the financial leverage that also contributes to hourly improvement. And we're really taking a holistic approach at looking at actions that we can take to move all those levers. And again we know that it's going to take some time it's a bit like moving the Titanic with only 13% of our lease fleet renewing in a given year, for example. So we're expecting it to take some time, but we're excited about the opportunities that we have in front of us to move in the direction of our goals.

Bascome Majors -- Susquehanna -- Analyst

So it sounds like positive renewals over time are a big piece of that? Or am I reading that (inaudible).

Eric R. Marchetto -- Senior Vice President at Trinity Rails

Bascome, this is Eric. Certainly, in this business we're expecting lease rates to improve over time, that's one of the tenets of investing in railcars and so as we go out over time certainly a big driver of it will be -- increase in lease rates and especially as the fleet ages the fleet, you know we have a relatively young fleet so that has -- that does not have the best return on equity on a book basis profile. So as that fleet ages and the lease rates either hold or increase we would expect there to be some natural benefits on a return on equity measure. So that certainly an impact, but I think in the near term a lot of the balance sheet optimization that Melendy talked about will have a greater impact in the near term.

Bascome Majors -- Susquehanna -- Analyst

Thank you. And last one for me. We talked a little about ARI their new owners just sold the railcar manufacturing business to Greenbrier to focus more squarely on leasing and your strategy post spin-off is built around growing both the size of and returns on your leasing business. Is Trinity committed to a vertically integrated manufacturing and leasing platform over the long term? Or is there a period at some point down the road when the lease size it gets to kind of where you want it to be and the returns are there that you might consider selling off that business and focusing straight on leasing?

Timothy R. Wallace -- Chairman, President and Chief Executive Officer

This is Tim. I covered in some of my remarks the benefits that we see of our integrated model and when it does for our platform having the leasing business and the manufacturing business connected. And we have talked about that subject for more than a decade at our board level and at the management level and we'll probably still continue to talk about it and assess it, we're an opportunistic company and you saw what we did last year in an effort to create shareholder value that's what our focus is. And so we take a lot of different things into consideration.

Thank you, Tim. I appreciate you being open on that. Thanks for your time.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Thank you, Bascome.

Operator

And this does conclude the Q&A session. I'd like to turn the program back over to the presenters for any additional remarks.

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Thank you, Aaron. That concludes today's conference call. A replay of today's call will be available after 1'o clock Eastern Standard time through midnight on May 2nd, 2019. The access number is (402) 220-7204. A replay of the webcast will also be available under the events and presentations page on our Investor Relations website located at www.trin.net. We look forward to visiting with you again on our next conference call and thank you for joining us this morning.

Operator

Thank you for your participation. This does conclude today's program. You may disconnect at any time.

Duration: 60 minutes

Call participants:

Jessica Greiner -- Vice President, Investor Relations and Communications

Timothy R. Wallace -- Chairman, President and Chief Executive Officer

Eric R. Marchetto -- Senior Vice President at Trinity Rails

Melendy E. Lovett -- Senior Vice President and Chief Administrative Officer

Allison Poliniak -- Wells Fargo -- Analyst

Paul M. Mauer -- President-TrinityRail Products

Justin Long -- Stephens -- Analyst

Matthew Brooklier -- Buckingham Research Group -- Analyst

Gordon Johnson -- Vertical Group -- Analyst

Matt Elkott -- Cowen -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

Mike Baudendistel -- Stifel, Nicolaus & Company -- Analyst

Bascome Majors -- Susquehanna -- Analyst

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