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Trinity Industries Inc (NYSE:TRN)
Q4 2019 Earnings Call
Feb 20, 2020, 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 include statements as to estimates, expectations, intentions and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain 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. I would now like to turn the call over to Jessica Greiner. Please go ahead.

Jessica L. Greiner -- Vice President, Investor Relations and Communications

Thank you, Carolina, and good morning, everyone. Thank you for joining Trinity Industries Fourth Quarter 2019 Financial Results Conference Call. I'm Jessica Greiner, Vice President of Investor Relations and Communications. I am pleased to welcome Trinity's New Chief Executive Officer and President, Jean Savage, who will provide some opening remarks today on our call; Eric Marchetto, Senior Vice President and Group President of TrinityRail will address Trinity's operations as well as provide insight into our market outlook; Melendy Lovett, Senior Vice President and Chief Financial Officer, will provide the financial highlights and 2020 guidance. Following the prepared remarks, we will hold a Q&A session. Yesterday, after market closed, Trinity reported strong fourth quarter and full year results for 2019. In the press release, we also provided our initial guidance and outlook for the full year 2020. During the call today, we will discuss certain non-GAAP measures. Definitions and reconciliations of these measures were provided in the tables of the earnings press release which is available at the Investor Relations section of our website at www.trin.net. It is now my pleasure to turn the call over to Jean. Thank you, Jessica, and good morning, everyone. I'm very excited to be here at Trinity and have the opportunity to talk to you today. In a moment, Eric and Melendy will discuss Trinity's fourth quarter and 2019 results. Having been in my new role for three days, I've tried to think of the most important things on your mind that I'm in a position to address today. And so I plan to discuss three things: who I am, why I'm excited to be at Trinity and at a high level, what are my plans for the company. I am an experienced transformational executive who has had the opportunity to work in multiple industrial businesses, including 12 years in the rail industry. During my career, I've had the opportunity to transform these businesses to deliver considerable value whether a change was needed due to fundamental market changes or business cycles, whether business needed operating structure improvements or whether a change was needed to grow the business through technology and innovative products. I strongly believe in listening to customers, employees and all stakeholders to gain understanding and knowledge of the business I'm diving into. I then use insights, these insights, in addition to the facts and data I gathered to determine where the opportunities are to make impactful, strategic decisions. You'll find I'm also a strong believer in a disciplined capital allocation and in planning for how this allocation may vary at different points in the business cycle. During my tenure with Progress Rail Services, I gained a very strong knowledge of the rail industry, including developing relationships with customers. At Progress Rail, we did everything from leasing railcars to repairing them in a network of shop to major modification programs, along with component remanufacturing, wheel shops, new locomotive manufacturing and locomotive repairs. In the last few years at Caterpillar, I led the transformation of the Surface Mining and Technology business, leveraging technology and innovation to change the way customers utilize the equipment we produce to positively impact their business operations. This work and experience in transforming various businesses has led me to the opportunity at Trinity to serve as the new CEO and President. It's the right role for me at the right point in my career, and I'm excited to lead Trinity into a bright new future. I love the rail industry, and I believe Trinity is the best platform in the industry. Trinity has a reputation for the highest quality railcars, the broadest range of service offerings and the deepest strategic relationship with customers. With all of the changing dynamics within the railcar supply chain, there's a real opportunity to accelerate Trinity's position as an industry leader in the railcar market through innovative products and services that will transition Trinity to a higher-quality recurring relationship business model. I also think there's a real opportunity to hone our strategy and optimize the organizational structure, cost structure and capital structure of the company to accelerate Trinity's financial performance. Trinity's management made some great strides in 2019 to improve ROE, lower Trinity's cost of capital, streamline the organization and reduce costs and to balance the capital allocation framework. That being said, management and the Board have higher expectations for driving the performance of the platform to new levels. The Board and management team are fully aligned and committed to optimizing Trinity's integrated platform of businesses to unlock the long-term value creation opportunities that the platform enables. Although it's too early to give specific plans or lay out a strategic roadmap for the company, I can share the areas in which I intend to focus my attention. First, I look forward to defining a strategic framework for the company with specific key performance indicators that we will share with the investors to help track and measure our performance. We will share these with you as our plans become more defined and specific initiatives are identified. I expect the initial focus of our strategy to center on the continued optimization of our operating platform and financial structure. As previously shared, we implemented certain restructuring activities late last year to bring an ongoing $8 million to $10 million improvement in our operating costs beginning in 2020. I do believe we have additional opportunity here, and Melendy will address our initial expectations in her guidance comments. We also have been clear in our intent to optimize the balance sheet by adding leverage to the lease fleet in order to reduce Trinity's cost of capital. The debt markets have been strongly receptive to Trinity's offerings, and we will certainly continue tapping this market to lower our cost of capital. There is a significant amount of capital that can be freed up, which brings me to my last point of focus. I mentioned earlier that I'm a strong believer in disciplined capital allocation, and that includes deploying capital for growth and returning capital to shareholders. We will develop a framework that enables Trinity to appropriately and consistently deploy capital depending on where we are in the cycle. The Board and management believe that the synergies from Trinity's platform create strong and predictable cash flows, enabling meaningful investment in high-return growth opportunities while returning substantial amounts of capital to shareholders. The cash flow generation potential of Trinity's platform is the biggest driver of long-term value creation. We do believe that our stock trades at a meaningful discount to the underlying intrinsic value of our assets, and it represents an attractive investment opportunity. As part of our objective to optimize our balance sheet, we expect to continue repurchasing shares. Trinity has staked its reputation on delivering premier performance. We have a responsibility to deliver premier performance to all of our stakeholders, both internal and external. I believe this organization is ready and positioned to make the needed changes toward stronger performance and to elevate and accelerate Trinity's position as a premier provider of railcar products and services in North America. Trinity's people bring a commitment to excellence, a customer-driven focus, a track record of execution and delivering quality products and services. I bring with me my experience and a sense of urgency with thoughtful and decisive action. I look forward to working with the Trinity team to elevate our financial performance and unlock value for shareholders, and to spending time getting to know and hear from you, our investors. I will now turn it over to Eric.

Eric R. Marchetto -- Senior Vice President and Group President

Thank you, Jean, and good morning, everyone. Trinity Rail delivered solid results in our first year as a rail focused company. 2019 was a year of transition as we began the optimization of our rail platform while encountering external challenges and changing market dynamics. The organization was focused on managing the business for quality over quantity and removing both structural and cyclical cost from our platform. Our owned and managed lease fleet grew by approximately 6.5% year-over-year to 125,000 railcars with attractive returns relative to our ROE target. We maintained high utilization, ending the year at 96% with higher average lease rates, and the organization delivered approximately 22,000 railcars at a 9.6% margin. Through it all, I'm very pleased that we delivered on our commitments to our customers.

Yesterday, in our press release, we provided segment details of our financial results for the fourth quarter and the full year 2019. Today, I'd like to focus on some of the strategic activities completed or initiated during the year that contributed to our results and that we expect will be foundational to our financial performance in the future. Our Rail Products organization had a very productive year. We move forward with substantial investments in our manufacturing footprint to bring to market state-of-the-art railcar coatings capabilities and maintenance shop capacity. These investments will help align Trinity's manufacturing capacity to customer demand and lower Trinity's lease fleet maintenance costs while growing our maintenance services business for key industrial customers. We also finalized integration of our Trucking and Logistics business from Trinity's diversified industrial business model into the Rail Products business as well as other facility maintenance and engineering support functions.

I am pleased with how these teams work together to streamline and improve our supply chain operation. In addition, our product development team continued efforts to focus on providing differentiated offerings with the launch of four new product designs and enhancements serving various markets. Our railcar leasing business made significant investments in technology and systems with the launch of our Trinity Rail Customer Digital Channel, which provides customers with anywhere, anytime access to key information and services needed to optimize the use of their railcars. This tool enables customers to reduce friction associated with managing railcars while providing significant productivity improvements to our organization. In addition, our investment in data and analytics capabilities over the last few years has had a meaningful impact on our commercial strategies. Looking into 2020, we are continuing to align our organization for improved operational and financial results through the entire railcar market cycle. However, industry fundamentals will be a challenging headwind to overall results for the year. Through 2019, the trade disputes and slowing North American industrial economy put negative pressure on rail traffic volumes, and consequently, demand for railcars declined.

This demand decline resulted in a growing fleet of underutilized railcar equipment and fewer new railcar orders. We expect it will take some time for the impact of recent trade agreements to translate into rail traffic volumes, but we are hopeful that the recent steps toward resolution of trade disputes will inject more clarity and certainty into the market. Improved railcar loadings will need to first absorb existing railcars before new orders accelerate. That being said, the North American economy is still a relative bright spot on the world stage. GDP estimates anticipate modest growth, and the consumer is still strong. Moving freight by rail is the most economical mode of land-based transportation for industrial shippers. We are somewhat encouraged by the recent narrative of certain Class one railroads to emphasize a focus on growth versus operating ratios.

While PSR initiatives seemingly improved 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. Key to our customer experience strategy is to optimize the ownership and usage of railcar equipment. Given the current level of demand and our near-term outlook, we are rightsizing our production capacity and being very deliberate with the business we pursue. The Rail Products team met a very challenging production schedule in the fourth quarter for our customers while transitioning to lower production levels for 2020.

Our first quarter deliveries will step down by roughly half compared to the number of deliveries in the fourth quarter, which includes costs associated with headcount changes of approximately 20% and lost efficiencies. The financial effects of this rightsizing will be a significant headwind to our first quarter financial performance. However, this action was necessary to establish the appropriate capacity for our 2020 delivery outlook. Our outlook for the year incorporates a fairly even production cadence with approximately 60% of our production schedule committed in the backlog. Approximately 17% of our lease portfolio is up for renewal in 2020. Current market rates are approximately 9% below expiring lease rates, which implies a 1% to 2% revenue headwind to the leasing segment. New railcar additions to the lease fleet are expected to offset this revenue headwind.

Our platform continues to demonstrate the ability to successfully navigate through challenging market conditions. Trinity's platform is built to deliver superior results through the railcar cycle. Our business model fosters engagement with the direct customer, delivering solutions that optimize the life cycle ownership and usage of railcar equipment, inviting our customers with a single source for all their railcar equipment and services needs. We made great progress in 2019 to improve our financial performance. In 2020, we will continue the optimization of our platform so that our financial results match the powerful commercial and strategic synergies of the business. Our vision is to be the premier provider of railcar products and services. The Trinity team is actively working to transform our organizational structure to lower our overall cost, elevate our customer service focus and pursue innovation to build on TrinityRail's position as the market leader.

I am pleased to have Jean on board as our new CEO and believe she will have a tremendous impact in improving our operational approach to unlock value and deliver better results. I'll now turn it over to Melendy to discuss our financial performance and guidance.

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

Thank you, Eric, and good morning, everyone. Yesterday, the company reported strong improvement in our fourth quarter and full year 2019 results. Revenues, adjusted operating profit and adjusting adjusted earnings per share all increased by double digits as a result of fleet growth with attractive pricing and higher railcar deliveries with a favorable product mix. Not only did our team deliver strong operational results in a challenging market environment, Trinity's leaders have made significant strides in executing against our strategic and financial priorities in our first full year as a rail-focused company. Our priorities for 2019 included optimizing our cost and capital structure, investing in value-creating growth opportunities and returning capital to shareholders.

We also committed to improving our financial filings and presentations to better highlight the value of the lease fleet and the rail platform. As Eric mentioned, leadership has been focused on streamlining our operating structure as we transition from Trinity's former multi-business holding company to a rail-focused company. These collective actions resulted in the reduction of more than $30 million of SE&A during the year. We have more work to do to optimize our business platform to the level of our expectations, and we are evaluating both cyclical and structural costs to enhance our performance. Another area of focus during 2019 was the optimization of our balance sheet. Trinity's loan-to-value ratio on the wholly owned lease fleet improved from 46.6% to 55.1% at the end of 2019 when including the debt funding from our corporate revolver. This was significant progress toward our goal to achieve an LTV ratio of 60% to 65% in the near term. We expect to achieve this LTV target within the next 12 to 18 months.

Our debt funding secured in 2019 was at very attractive interest rates. And as a result of our optimization efforts since the spin-off, Trinity has lowered our weighted average cost of capital approximately 150 basis points. Balance sheet optimization and increased profitability through strong execution and reduction of costs resulted in Trinity's year-over-year pre-tax return on equity increasing from 6.3% to 9% in 2019. Trinity established a 3-year average pre-tax ROE goal of 11% to 13% in early 2019, which aligns with our long-term pre-tax ROE target of mid-teens through the cycle. We are pleased with the solid progress in our first year. Softer railcar demand will create a very challenging headwind for 2020 ROE improvement, but we are focused on the levers within our control. Our current guidance would lead to a pre-tax ROE of approximately 10% to 10.5% in 2020. Trinity also made significant progress in demonstrating the cash flow generation capability of our rail platform. Free cash flow before lease fleet investment was $423 million for the year, higher than our 2019 forecast as a result of strong improvement in working capital management as well as the delivery of railcars at the high end of our most recent guidance.

As Jean said earlier, the cash flow generation capability of Trinity's rail platform is a significant driver for long-term value creation. Management and the Board believe that the platform can yield strong and predictable cash flows, enabling meaningful investment in high-return growth opportunities and substantial return of capital to shareholders. To put this in perspective, during 2019, Trinity invested in the growth of our portfolio with net lease fleet additions of approximately $875 million on a cash basis. This growth was funded through our available cash on hand and appropriate use of leverage. We also invested nearly $100 million in manufacturing capex for the growth of our railcar maintenance business and paint and lining capacity, as Eric mentioned.

Our capital allocation during 2019 also included $377 million in returns to shareholders through share buybacks and dividends, returning approximately 14% of our market cap. We have approximately $1 billion in liquidity and have ample room to continue leveraging our balance sheet. Now moving to guidance. Our capital allocation plan for 2020 follows a similar framework and underscores the value creation of our businesses. Our capex guidance for 2020 includes approximately $90 million to $100 million for nonleasing capex and approximately $435 million of net lease fleet investment, requiring less than $100 million in equity capital at a 70% loan-to-value. Our free cash flow before lease fleet investment is expected to be approximately $600 million to $650 million, providing ample room to return substantial capital to shareholders after investing in our business for growth. Guidance for our financial performance in 2020 includes the following: top line revenues of approximately $2.5 billion to $2.7 billion after elimination and earnings per common diluted share in the range of $1.15 to $1.35.

Our financial assumptions include a production forecast of 16,000 railcars, of which approximately 40% will be delivered to our lease fleet and an approximate margin of 7% for the Rail Products segment. Leasing revenue of approximately $800 million with a 4% to 6% operating margin and $50 million of profit from sales of leased railcars from our portfolio. Our 2020 guidance also includes significant cost savings opportunities across SE&A and administrative cost of sales with the goal of approximately $25 million to $30 million of reduction compared to 2019. Interest expense and the tax rate are expected to be approximately $225 million and 27%, respectively. As you heard Jean mention, we will be active in share repurchases through the year as we continue to optimize our balance sheet. Our EPS guidance range incorporates meaningful amounts of share repurchases, subject to Board authorization. The 2020 guidance does exclude items outside the normal course of core operations such as restructuring activities or pension plan termination charges, which we will report the effect of if and when they occur. Regarding EPS cadence, our full year EPS range compares favorably to 2019 fiscal results.

However, our first quarter financial results will face significant headwinds before recovering through the year. As Eric mentioned, the Rail Products group is transitioning to a much lower level of deliveries and is impacted in first quarter 2020 by lost efficiencies and rightsizing costs. Other items that will affect our earnings cadence include sales of leased railcars and SE&A cost savings. At this time, we expect sales of leased railcars to be primarily concentrated in the second half of the year. SE&A cost savings will build through the year as we execute on initiatives to lower the associated cost. You may have seen in our press release yesterday that we are changing the estimated depreciable lives of our railcar lease fleet.

This is expected to have a positive impact on our financial performance of approximately $27 million to $33 million year-over-year or $0.14 to $0.18 in EPS, and this is included in our financial guidance. In our evaluation process, we compared our depreciation policy to extensive company and industry data and analytics. Our analysis supports the extension of our estimated depreciable lives based on the performance and maintenance history of the railcars in our lease fleet and moves Trinity more in line with the practices and performance of peers in the industry while still being at the lower end of public comp. We also believe the updated estimated depreciable lives better aligns our accounting policies with the economics of our leasing business. Following our conference call today, we will file our Form 10-K for 2019.

Included in the report are enhanced disclosures around the economics of our business, including a selected consolidated balance sheet for the leasing company. As of year-end, the leasing company carried total equity of $2.3 billion. This would be the comparable equity balance to a stand-alone leasing company. In consolidation, the adjusted leasing group equity amounts to $1.5 billion, reflecting the cost-advantaged equipment sourcing from our own manufacturing business, one of the tangible benefits of our platforms. These disclosures along with other metrics provided during the year, including the pre-tax ROE target and free cash flow before leasing capex, are all aimed at showing how management assesses the value of our business and highlighting Trinity's opportunities to create significant value for shareholders.

We made significant progress in 2019, demonstrating the value of our platform, improving ROE, lowering our cost of capital, streamlining the organization, reducing costs and committing to a balanced capital allocation framework, investing in business growth and returning capital to shareholders. But we know we have more work to do. As Jean mentioned, management and the Board have higher expectations for driving the performance of our company to new levels. We understand in 2020, we're tasked with transforming Trinity against challenging market headwinds. Trinity's culture and commitment to excellence are great strengths and legacies of this company. We're very excited to have Jean on board. She has always admired and respected Trinity, she recognizes the strengths of our people and our culture, and she's experienced in leading transformative change. We will now transition into the Q&A session. Operator, will you please give our listeners the instructions?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Justin Long with Stephens. Your line is open.

Justin Long -- Stephens -- Analyst

Thanks. Good morning and Jean, congrats, and look forward to working with you.

E. Jean Savage -- Incoming Chief Executive Officer and President

Thanks, Justin.

Justin Long -- Stephens -- Analyst

So maybe to start with the 2020 revenue guidance. I'm having a little bit of difficulty bridging to the $2.5 billion to $2.7 billion on a consolidated basis with some of the assumptions that have been laid out. Is there anything unusual with mix or the magnitude of eliminations or maybe the railcar sales all being units that are younger than one year that are included in that revenue number? I think it would just be helpful to get a little bit more color on each of the components that bridge to that total revenue outlook.

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

Morning, Justin, it's Melendy. There is there's not really anything unusual in the $2.5 billion to $2.7 billion consolidated revenue number. Certainly, if you'd like a follow-up call later today, Jessica and I'd be happy to go into the details and help you with any with anything we can.

Justin Long -- Stephens -- Analyst

Okay. And on the share count, you mentioned you're incorporating a significant amount of buybacks. Would you be able to share what number you're using for the share count in 2020?

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

Since the spin-off, you know that we have consistently stated our plans to return meaningful and consistent capital to shareholders. And you've seen us do that in 2019 through both share buybacks and increasing our dividend. We certainly expect the cash flow generation of our platform to allow us to continue to do this. Our 2020 guidance range incorporates potential share repurchases that are roughly equal to what we did in 2019. And of course, this is subject to Board authorization.

Justin Long -- Stephens -- Analyst

Okay. That's helpful. And lastly, maybe this is one for Eric. Just in terms of the demand dynamics for railcars, we're close to two months into the year, what have you seen in terms of order and inquiry activity year-to-date? And any kind of early expectation on how first quarter orders could look relative to what we saw in the fourth quarter?

Eric R. Marchetto -- Senior Vice President and Group President

Sure, Justin. This is Eric. As we began 2020, railcar loadings, at the top line, railcar loadings are still pressured. We're still seeing year-over-year trends that are unfavorable. Although we are seeing several areas of recent improvement, parts of the chemical space, they're improving, the refined products, some of the farm products and autos, we've seen improvement there. When you look at our guidance of 16,000 railcars delivering for the year, there's we said about 60% of those in our backlog. So that implies that we still have railcar order activity that we're going to have to get in the next couple of quarters to achieve those 16,000. What we're seeing so far this year and what we'd expect is kind of that pace that we saw in the in 2020 in the second half of 2020 to continue through this year or through the first couple of quarters into this year.

E. Jean Savage -- Incoming Chief Executive Officer and President

I think you mean the second half of 2019?

Eric R. Marchetto -- Senior Vice President and Group President

Second half of 2019, yes, continuing into the first part of 2020. That's what's kind of baked into our that's what's implied in our guidance.

Justin Long -- Stephens -- Analyst

Okay, great. That's how I'll leave it at that. I appreciate the time.

Operator

Thank you. And your next question comes from Matt Elkott with Cowen. Your line is open.

Matthew Elkott -- Cowen -- Analyst

Good morning. Thank you, Jean, congratulations. I look forward to working with you. My question is, it looks like you guys are expecting 5% or 6% growth in leasing revenue in 2020. But based on your guidance for railcars built for the lease fleet, which is lower last year and your guidance for sale of railcars, it looks like maybe your lease fleet is going to grow at a lower rate than the revenue growth rate by at least a couple of percentage points. And then renewals are going to be a headwind this year. So if that's true, are you baking in secondary market purchases that would allow you to hit that $800 million revenue growth goal?

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

Good Morning, Matt, it's Melendy. I'll start in responding to your question. Our assumption as far as the percentage of railcars that are going into the lease fleet is roughly the same as it was in 2019. Just a reminder that the eliminations now include modifications and betterment as well as the additions to the lease fleet. So the fact that our deliveries have come down from 2019 is the primary driver of the number of railcars being added to the fleet coming down. As far as question around secondary market sales, we do have a small amount of secondary market sales planned into our net lease fleet investment guidance that I shared. You're right that our current forecast of sales of leased railcars and the operating profit resulting from that is lower than our 2019 results. And part of the reason for that, a reminder, we had sales-type leases that are showing up in our car sales numbers for 2019, and that was $160 million. So that's the primary reason for 2019 car sales being at a higher level than 2020.

Matthew Elkott -- Cowen -- Analyst

Okay. But you're not baking in any type of secondary market purchases for your lease fleet in the guidance?

Eric R. Marchetto -- Senior Vice President and Group President

Right, right. When you if you're looking at leasing revenue, the main drivers there, as I mentioned in my comments, are there's a headwind on renewals as you noted. And then there's going to be fleet growth, which was the numbers Melendy talked about in terms of our additions to the fleet. Where you're getting differences in terms of the amount of fleet growth we're expecting relative to the revenue number, that's mainly going to be the timing of both the headwind on renewal activity and then the timing of deliveries to the fleet. There's not any big secondary market purchases that are baked into that guidance.

Matthew Elkott -- Cowen -- Analyst

So does that mean, Eric, that the additions to the lease fleet will happen earlier than the bulk of the headwind on renewals?

Eric R. Marchetto -- Senior Vice President and Group President

It would imply that. Also remember that the railcars that we're adding to the fleet are going to be more expensive and have higher lease rates than existing railcars. So you got a little bit of mix changes as well in terms of the nature of that revenue.

Matthew Elkott -- Cowen -- Analyst

Got it. And just one more question, Eric. The last time you guys did 7%, I think was 7.4% manufacturing margin was in 2018. I think your deliveries were about 20,000 cars. Now you're guiding for 7% on 16,000 cars. Can you help us understand, despite the fact that you may have a negative mix shift in 2020, why you're able to get that same margin as 2018 on lower deliveries?

Eric R. Marchetto -- Senior Vice President and Group President

Well, the obvious is better performance. But besides that, you certainly do have a mix. The mix change is going to be a big piece of it, for sure. And we as we see it as a headwind, a step down of roughly 30% of both industry deliveries and our own production footprint. So I really don't think of it as better performance than 2016. We're looking to improve our performance this year over what we're saying. We're going to continue to take costs out of our platform and improve what we're doing.

Matthew Elkott -- Cowen -- Analyst

If you if we look back at the last five or six years, I think your margins got up to about 21% during the crude-by-rail boom. And the bottom was 2018 at 7%, which is similar to what you're expecting in 2020. If we look at a normalized mid-cycle margin going forward given all the rightsizing and the cost-cutting you're doing in the manufacturing segment, what would that look like?

Eric R. Marchetto -- Senior Vice President and Group President

I think you really have to pull out some of the high margins from the crude cycle just because the inelasticity of demand that we experienced in that time railcar delivery was never so powerful as at that time, and we're not anticipating that in the near term with our guidance. So when you look at if you pull that out, mid-cycle margins for us are going to be in that where we're talking about this year, in that high single digits margin percentage is what we'd expect. Mid to high, we expect, I guess where I'm at.

Matthew Elkott -- Cowen -- Analyst

Thanks, guys.

Operator

Thank you. And your next question comes from Allison Poliniak with Wells Fargo. Your line is open.

Allison Poliniak -- Wells Fargo -- Analyst

Hi, guys. Good morning. Just want to go back to, I guess, the cars that you're putting in the lease fleet that are new for manufacturing. Could you give us a little color in terms of, obviously, utilization at 96%. You have some cars sitting idle, and you certainly have some renewals coming up. Is there a unique end market that's driving some of that new interest or that growth relative to what you have out there right now? Any color there that you can help?

Eric R. Marchetto -- Senior Vice President and Group President

Sure, Allison, this is Eric. Absolutely. When you look at if you just step back and look at new railcar demand, replacement demand is still the single largest driver that is driving new railcar builds. And while we have as you mentioned, idle, 96% utilization so that implies available railcars. And then when you look at the industry fleet, some of the underemployed and unemployed railcars in the market, there are still pockets of strength. I think I mentioned earlier we're seeing demand in the chemical space, specifically, plastics, refined fuels, which would be a lot of tank car demand, some of the farm products and autos. So while there are the market is fairly efficient, but it's not perfectly efficient. We are seeing demand for some of those markets that have pockets of growth whether that's growth in terms of railcar loadings or replacement demand. The replacement demand is going to be mainly around the boxcar fleet.

Allison Poliniak -- Wells Fargo -- Analyst

Got it. And then just your thoughts on storage. Obviously, with the interest in newer cars, more efficient cars, any thoughts on what's that real storage number? What should it look like through a cycle? Obviously, we're elevated now giving traffic, but I assume some of that's certainly not going to come back in terms of capacity.

Eric R. Marchetto -- Senior Vice President and Group President

Allison, this is Eric, and that's a certainly a lot gets talked about by the railcars and storage that the AAR puts out. And as we look at it, we kind of break that into two categories I mentioned earlier. You have unemployed railcars, which literally would be railcars and storage, then you have underemployed railcars. That AAR measure looks at railcars that haven't made a revenue move in 60 days. There is a good portion of the fleet that doesn't make a revenue move in 60 days but still under leased and active part of the lease fleet. Some examples of that would be plastics cars, some of the seasonal fleets, grain cars, fertilizer, railcars, pressure tank cars for LPG have a seasonal aspect to it. And then there's buffer fleets that shippers have extra cars in order to compensate for some of the volatility of railcar service.

And so that's it may not make a load in 60 days, but it's still an active part of their fleet. So when you look at the I think the more important number there is the change that has happened. And when you look over the last year, that number that the AAR puts out has been about increase of about 100,000 railcars. The biggest driver there were small cube covered hoppers that we think have increased by about 30,000 railcars since this time last year in that number. So that's a big driver. And then some of the other results from traffic trends, which is fewer coal moves has been a big impact. I don't see as much of an impact from PSR. I would say the impact from PSR is probably less than 1/4 of that increase in that number that the railing puts out. Is that helpful?

Allison Poliniak -- Wells Fargo -- Analyst

Yes. No, that's very helpful. And then just last for me. On the SE&A cost savings that you expect to do this year, is there a way to think about that structural versus cyclical? Or is it too muddy at this point?

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

We are evaluating as we mentioned, Allison, we're evaluating both structural and cyclical aspects of our business in order to achieve the savings. And I'm not really prepared to break out that level of detail at this point in time. But what I can tell you in terms of modeling is we expect the majority of those savings to come out of that total SE&A number that's around $263 million for 2019. Not all of the cost reductions will be SE&A, but we expect the majority to be.

Allison Poliniak -- Wells Fargo -- Analyst

Great. Thank you.

Operator

Thank you. And your next question comes from Bascome Majors with Susquehanna. Your line is open.

Bascome Majors -- Susquehanna Financial Group -- Analyst

Yes, Melendy, I believe I heard you say that your guidance assumes share repurchases are going to be similar this year versus last, which would certainly suggest the authorization needs to be resumed sooner rather than later given the 2.6 million shares remaining on it. But I think you've also mentioned before that, that authorization was sized up to avoid running afoul of an IRS private letter ruling related to the spin-off. Can you help clarify where we might be off here, and what the buyback intentions are for investors?

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

You're correct. What I shared was that our 2020 guidance range, it includes potential share repurchases that are roughly equal to what we did in 2019, subject to Board authorization. And certainly, Bascome, tax considerations are one of the important factors that we consider in our share repurchase plan. So that will have an influence on our timing.

Bascome Majors -- Susquehanna Financial Group -- Analyst

Okay, understood. One more on capital allocation here. You've talked about growth capex. Are acquisitions a part of the Trinity strategy in the next 12, 18, 24 months? And specifically, could you go beyond investing in railcar assets to really adding adjacent service lines or rail-related businesses to build the portfolio more broadly and to the more recurring kind of revenue stream that you alluded to in your prepared remarks?

E. Jean Savage -- Incoming Chief Executive Officer and President

So Bascome, this is Jean. I will say that we're always looking for the right time and the right opportunity to make investments. And as we discussed earlier, we're wanting to make sure we have a balance in both growth and in returns to our shareholders. So we are keeping a list. We'll continue to monitor that and see if we find the right purchase at the right time.

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

And Bascome, I would add that we mentioned in our comments that our near-term focus is on optimizing our platform of business and really driving the financial performance improvement. So totally agree with Jean's comments. We're continuing to look for the right opportunity at the right valuation with our main focus being on optimizing our existing businesses.

Bascome Majors -- Susquehanna Financial Group -- Analyst

Okay. And last one for me. Jean, when do you think you're going to be far enough along in your strategic planning efforts to deliver that plan to investors whether that comes via an Analyst Day or some other format?

E. Jean Savage -- Incoming Chief Executive Officer and President

Well, as far as the timing, we're still working. This is day three or actually the start of day four for me. So if you give me a little bit more time, I'll get that out to you. But I am planning on doing some calls in the near term and then making sure that I get out and talk with our investors. And so I will do some type of a roadshow or visit. Hopefully, that helps, but that's all I can give you right now.

Bascome Majors -- Susquehanna Financial Group -- Analyst

All right. Thank you. Appreciate it.

Operator

Next question comes from Gordon Johnson with GLJ Research. Your line is open.

Gordon Johnson -- GLJ Research -- Analyst

Hey guys, thanks for taking the questions.

Eric R. Marchetto -- Senior Vice President and Group President

You're welcome.

Gordon Johnson -- GLJ Research -- Analyst

All right. So I guess, first, you guys talked about you need to see some increased orders to hit your guidance for 2020. Can you give us some sense of kind of what the lead times are with respect to those orders? And when should we expect you to start to see those orders to kind of get toward your 2020 guidance?

Eric R. Marchetto -- Senior Vice President and Group President

Sure, Gordon, this is Eric. I'll speak in generalities around that. What I said is that our guidance implies that we have unsold space in our guidance of 16,000 railcars. So generally, the timing of those orders are going to have to be the first half of this year in order to place deliveries. So I would say, generally speaking, it's going to be in the first or second quarter our order activity in order to deliver it in 2020.

Gordon Johnson -- GLJ Research -- Analyst

Okay. That's helpful. And then can you guys help me understand, it seems like you guys changed the definition with respect to free cash flow, where you're including the sales of fleet in free cash flow, but the capex associated with that fleet isn't included in free cash flow. Can you guys help me understand how to navigate that definition?

Jessica L. Greiner -- Vice President, Investor Relations and Communications

Gordon, this is Jessica. As Melendy mentioned, we did provide free cash flow before lease fleet investment following our last conference call. That was a new measure that we provided, and it was in our earnings release. We've maintained the definition of that non-GAAP measure. So happy to walk you through any particular questions you may have about the measure.

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

And Gordon, this is Melendy. I would just add that the reason we want to talk about free cash flow before our lease fleet investment's because we consider that lease fleet investment discretionary and driven by demand in the marketplace. And just a reminder that, that lease fleet investment we're talking about on a cash basis, the total cash that it takes to grow our lease fleet, but we can lever that, those adds to the lease fleet on their market value rather than their cost. And that's a real advantage to the platform. So that's an important driver for why we've chosen the free cash flow before lease fleet investment definition.

Gordon Johnson -- GLJ Research -- Analyst

Okay. That's helpful. And then just one last one. As we look to the orders with respect to the RSI numbers that are reported, it looks like kind of you guys averaged around 30% to 40% of those RSI orders. So as we look to those numbers coming out for Q1, I guess, over the next couple months, are you guys ingraining in your guidance a significant increase in industry orders? Or would you say that you have the visibility into your own orders that even if the industry orders are low, you're confident you'll still be able to hit your guidance? Thank you.

Eric R. Marchetto -- Senior Vice President and Group President

Thank you, Gordon, this is Eric. I'll answer that. I think I mentioned this earlier that we're into what is implied in our delivery guidance is order level in the first half of this year that's going to be consistent with what the industry experienced the second half of 2019. So it would imply both industry activity and our own orders that we take. I feel good about the visibility that we have to date with the orders we've taken, and we still have work to do in order to hit that delivery target for the year.

Gordon Johnson -- GLJ Research -- Analyst

Thanks again, guys. Good luck.

Operator

Thank you. And the next question comes from Steve Barger with KeyBanc Capital Markets. Your line is open.

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

Hi, good morning.

Steve Barger -- KeyBanc Capital Markets. -- Analyst

Good morning. Melendy, sorry if I missed this, but when you were talking about the headwinds in 1Q from the transition to lower production and how that's going to pressure 1Q, will that drive EPS down into the single digits? Or maybe can you talk about the percentage of EPS you expect in first half versus second half?

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

Good morning, Steve, we don't give quarterly guidance. And so just wanting to let you know that our first quarter is being impacted by lower deliveries, lost efficiencies and rightsizing costs. I think your thoughts are generally in the range but again, not wanting to turn it into quarterly guidance.

Steve Barger -- KeyBanc Capital Markets. -- Analyst

Understood. And Jean, I welcome aboard. I know you started this week, but since you do have that experience at Progress and having been on the Board, you know PSR has been a huge topic in 2019. Any thoughts on how you view that in terms of positioning Trinity relative to opportunities or threats from that?

E. Jean Savage -- Incoming Chief Executive Officer and President

Sure. I think, overall, for the industry, PSR will help us increase the efficiency of that mode of transportation and allow future growth. So as you look at both sustainability and the fact that transportation by the rail is four to 6 times more sustainable than by trucks that I think you'll see a movement over time as the overall performance of the railroads to deliver the product at the right time and consistently for their customers. So I guess, that's what I would say for the PSR. I think it's good for us and good for the railroad.

Steve Barger -- KeyBanc Capital Markets. -- Analyst

Got it. And just thinking about your experience that you talked about in the surface mining business and again, in Progress, can you talk about early thoughts on the opportunities to bring technology into Trinity to help optimize the business? Maybe talk both internally and for external initiatives?

E. Jean Savage -- Incoming Chief Executive Officer and President

Sure. I'll just start out with some of the work that I did with surface mining and technology. It was all about making the performance of the total cost of ownership for our customers the best and the lowest it could be. We used technology to help them understand where their equipment was, how it was performing and also how to get the maintenance done before they had either an issue or a breakdown of that equipment. Same type of philosophy can work for the railcars that we have in monitoring the health of those railcars, making sure that we can plan to pull those cars out of service prior to them having an issue with that car and having it that order maybe then set out of use for them. So I think as we look to how we make improvements, there's that. There's also, for tank cars, some sensors that we can put on them to help us see how those tank cars are performing, make sure that if there are any emerging issues or concerns that we can notify both the shipper and the railroad.

Steve Barger -- KeyBanc Capital Markets. -- Analyst

Thanks for that color. And then just last one for me. Eric, I think you addressed this to some degree, but 2019 orders were the lowest since 2016. And I know it's tough forecasting cycles. But did I hear you say that you think this 10,000 run rate for Trinity is kind trough-ish?

Eric R. Marchetto -- Senior Vice President and Group President

I did not say that. But what I did say was that the industry I expect in the near-term, industry orders to maintain that pace that we saw in the fourth quarter, third and fourth. It's all Steve, I'm not trying to be cute, but it all gets back into what's going on with railcar loadings. They've still been unfavorable. I would have expected them to turn because the comps are a little bit easier. They have not yet. So we got to keep watching what's going on in terms of railcar load activity. That will lead our outlook on railcar demand.

Steve Barger -- KeyBanc Capital Markets. -- Analyst

Very good. Thank you.

Operator

And the last question comes from Douglas Greiner with Wilbanks, Smith and Thomas. Your line is open.

Doug Greiner -- Wilbanks, Smith and Thomas -- Analyst

In regard to the balance sheet optimization plan, specifically moving from the 55% LTV on the wholly owned lease fleet to the 60% to 65% target over the next 12 to 18 months, what are the steps in that operational plan and the biggest challenges you're facing in order to execute on that successfully? Thanks

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

Good morning, Doug, this is Melendy. As far as the specific steps, that's going some of that's going to depend on what our commercial activity is, what our railcar investment vehicle partners are doing. But basically, the steps are we have set the 60% to 65% goal as a near-term goal. I mentioned we expect to reach that in 12 to 18 months. So basically, as we need the capital to grow our business and to return capital to shareholders, we will go out to the debt markets and evaluate what is the right debt for us to raise given the cost of debt in our time horizon and such. And on an as-needed basis, we will add that debt to our lease fleet to move that loan-to-value to the 60% to 65% level.

Eric R. Marchetto -- Senior Vice President and Group President

Doug, I'd just add, this is Eric, that the debt the capital markets are certainly available for us to issue to get more capital.

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

And as far as the challenges, I would say the challenges are mostly related to, like I said, things that are out of our control. So timing. For example, this year, we had forecasted to have our loan-to-value at 57%. We ended the year at about 55% because we did better on our working capital management and didn't need to raise as much capital.

Jessica L. Greiner -- Vice President, Investor Relations and Communications

Great. Thank you, Carolina, and to all of our investors. That concludes today's conference call. A replay of today's call will be available after 1:00 Eastern Standard Time through midnight on February 27, 2020. The access number is 4022207233. 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. Thank you for joining us this morning.

Duration: 60 minutes

Call participants:

Jessica L. Greiner -- Vice President, Investor Relations and Communications

Eric R. Marchetto -- Senior Vice President and Group President

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

E. Jean Savage -- Incoming Chief Executive Officer and President

Justin Long -- Stephens -- Analyst

Matthew Elkott -- Cowen -- Analyst

Allison Poliniak -- Wells Fargo -- Analyst

Bascome Majors -- Susquehanna Financial Group -- Analyst

Gordon Johnson -- GLJ Research -- Analyst

Steve Barger -- KeyBanc Capital Markets. -- Analyst

Doug Greiner -- Wilbanks, Smith and Thomas -- Analyst

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