Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Trinity Industries Inc (NYSE:TRN)
Q3 2020 Earnings Call
Oct 22, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Trinity Industries Third Quarter Results Conference Call. [Operator Instructions] 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 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 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 these forward-looking statements. [Operator Instructions] and I will be standing by should you need any assistance.

It is now my pleasure to turn the call over to your Vice President of Investor Relations, Jessica Greiner. Please go ahead.

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

Thank you, David. Good morning, everyone. I'm Jessica Greiner, Vice President of Investor Relations and Communications for Trinity. We appreciate you joining us for the company's third quarter 2020 financial results conference Call. Our prepared remarks will include comments from both Trinity's Chief Executive Officer and President, Jean Savage; and Eric Marchetto, the company's Chief Financial Officer.

We will hold a Q&A session following the prepared remarks from our leaders. During the call today, we will refer to a few slides highlighting key points of discussions. The supplemental materials are accessible on our IR website at www.trin.net. These slides can be found under the Events & Presentations portion of the site along with the third quarter earnings call event link.

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

E. Jean Savage -- Chief Executive Officer and President

Thank you, Jessica, and good morning, everyone. Trinity has been on a transformative journey over the last year to realign our business, our people, our cost structure and our purpose to deliver superior returns to our shareholders. The timing and execution of these initiatives were challenged by the COVID-19 outbreak. I want to commend our people and our business leaders for their resiliency and commitment to overcoming the hurdles caused by the pandemic and their efforts to establish our strategic framework for the future, all while delivering high-quality products and services to our customers.

As a major milestone in our journey, Trinity will host a virtual Investor Day in four weeks. At this event, the management team will present our value proposition and strategic framework for accelerating our financial performance. Today, we want to focus on the results of the third quarter and highlight how our results and actions taken during the quarter align with our goals that you will hear more about in the coming months. The goals of our strategic framework are to: one, optimize the returns of our lease fleet; two, reduce the impact of cyclicality; and three, to increase the modal advantage of the railcar industry. In the third quarter, Trinity implemented its new strategy. We expect these strategic shifts to drive operating model performance and generate superior shareholder returns.

Our strategy is grounded in our newly defined purpose of delivering goods for the good of all. This purpose seeks to emphasize for all Trinity stakeholders the essential role that rail transportation plays in our daily lives as we dinner with our families, cleaner homes, fuel our cars and lead a safe and happy life. Trinity has a rich history, a legacy of strong growth and a reputation of flexibility. With these attributes and our new focus, Trinity's premier railcar products and services will support essential North America supply chains. Going forward, we'll emphasize the optimization of our platform and scale new products and service offerings that will make our existing investment more valuable. This strategy will place more importance on cash flow and returns.

Resulting in more disciplined levels of growth through the cycle. Our management team continued our progress in optimizing the cost structure of the business during the third quarter. As a result of the new strategy, we have additional headcount and other administrative cost reductions. We also made the decision to exit the U.S. trucking and logistics business, and outsourced this service to third parties. With this, we have a small impairment charge relating to the trucking fleet that have primarily serviced Trinity's former industrial businesses. When including the actions from the first half of the year, Trinity has implemented over $80 million worth of reduction in operating costs and other related costs.

Please refer to Slide four of our supplemental materials. We continue to rationalize our footprint as well. During the quarter, further rightsizing resulted in a total manufacturing headcount reduction of 47% year-to-date. We anticipate there could be additional reductions heading into the beginning of next year. We are evaluating our material cost and reviewing the relative spend between direct and indirect cost in order to lower our breakeven point. We believe through various cost efforts, the rail segment margin could meaningfully improve throughout the cycle. We'll share more detail on these efforts at our upcoming Investor Day. As you saw in our press release, we are also working on our balance sheet optimization, and Eric will talk to you about our successes in the financial overview.

Overall, our business results were in line with our expectations from our base case scenario provided at the start of the COVID-19 pandemic. Our Leasing business is holding steady at around 95% utilization, and we are controlling costs in order to minimize the impact of lower lease rates on renewals. Lease rates on renewals declined in the third quarter relative to their expiring rates. However, pricing sequentially held fairly stable from the second quarter. Our portfolio of exploration, subject to renewal over the next 12 months, is in line with our typical 15% to 20% average, and we are closely monitoring our markets for signs of improvement.

Based on recent market pricing for renewals, the lease rates for our current expirations in 2021 will have a much easier comp relative to the expirations this year. We have already noticed improvements in certain markets like agriculture, including grain and intermodal, while other markets like energy, continue to see headwinds. As an operating lessor, we aim to differentiate our product and service offerings on customer experience, making the ownership and usage of railcar equipment a more attractive and valuable proposition for industrial shippers. Scaling additional services that we can provide that leverage our broad platform, market knowledge and analytics of our owned and managed lease fleets can bring a premium recurring revenue stream to the business.

More recently, we've been developing the analytics and infrastructure to support the addition of telematics on railcars and have partnered with other leading rail service providers to create a new technology platform, called Rail Pulse, that we believe will help transform rail shipping in the future. While this platform and resulting services are in the early stages of development, we believe these capabilities are a key factor in improving the rail industry's competitive position relative to other modes of transportation longer term. Looking again at our third quarter performance, we incurred start-up costs for our new maintenance facility in the Midwest as we onboarded new employees and accepted our first customers into the plant.

We expect the inefficiencies from the start-up of operations to be a headwind for the segment margin in the coming year. But we do expect the new facility to be accretive to earnings in 2021. With the capacity from this new facility, we believe we have the capability to service and maintain up to 60% of our lease fleet in-house. This exceeds the target we set two years ago at the time of spinoff. We will continue to evaluate further growth of our maintenance services business including the expansion of service capabilities in underserved markets. As I mentioned, our manufacturing operations continued to slow their production into the third quarter with additional rationalization of our headcount.

However, this was not at the same pace as the reduction we had in the second quarter, which allowed us to limit the amount of disruption to our plant. In our base case scenario, our production plans for the remainder of the year assume the full delivery of our 2020 backlog. This would result in just over 11,000 railcars delivered in 2020. During the third quarter, rail manufacturing received orders for 2,000 railcars composed primarily of larger complex transactions that reflect the strength of Trinity's rail platform and our ability to tailor solutions for our customers. These orders were predominantly for 2021 delivery and reflect competitive market pricing.

We continue to see a good pipeline of inquiries for railcars, new and existing. Like so many others, our business continues to operate with an even greater emphasis on the health and well-being of our people. Looking out over the next few years, we see the broader economic recovery driving more rail shipments and equipment demand as business and consumer confidence renewed and shippers across the continent feel confident in making long-term capital decisions. Railcar loadings rebounded during the third quarter from the historical declines earlier this year. However, market uncertainty continues to cloud near-term demand for railcars as much of the economy remains under pressure, given the COVID-19 pandemic.

We remain cautiously optimistic regarding the trajectory of demand heading into next year. Given the range of possibilities based on potential scenarios for the economy, the election and the pandemic, we are still operating in a very fluid environment and are electing to not provide guidance. That being said, we are committed to improving the financial performance of our platform, and we believe much of the improvement is within our control. A recovery in the cycle when it occurs, will be an added tailwind.

Eric, I'll turn it over to you to discuss some of our financial initiatives.

Eric R. Marchetto -- Executive Vice President and Chief Financial Officer

Thank you, Jean, and good morning, everyone. Trinity's platform has demonstrated the ability to generate significant cash flow from originating railcar transactions that leverage the synergies of our business model. We believe the cash flow generation from our platform and the ability to optimize our balance sheet within a disciplined capital allocation framework will create long-term shareholder value. During the third quarter, Trinity generated $129 million of cash flow from operations, resulting in year-to-date adjusted cash flow for operations of $596 million. Our investments for the quarter included approximately $183 million of net lease investment for new railcar additions and fleet modifications and $29 million for other enterprise capital expenditures.

As Jean has said, optimization of the Trinity rail platform has been a key focus for management and the Board in the last year. We are addressing optimization in all areas of our organization, our operations and our balance sheet. The combination of balance sheet optimization with a disciplined capital allocation framework, underscores our commitment to being a returns-focused company. We made additional progress in the third quarter, and since quarter close, and raising the leverage on our lease fleet to lower our cost of capital. In late July, we completed the upsizing of our TRL2017 financing with an additional $225 million of debt funded at LIBOR plus 1.50%.

Earlier this week, we also redeemed $153 million of secured railcar equipment notes, bearing interest at 3.8%, and issued a new $156 million securitization bearing interest just below 2%. We are further evaluating the capital markets and taking advantage of an attractive interest rate environment to lower our cost of capital. Trinity is operating in line with the base case scenario that we presented to investors as a guidepost at the start of the pandemic. As contemplated within our base case scenario, we have maintained our dividend and completed our share repurchase authorization. During the third quarter, we returned approximately $111 million of capital to shareholders through dividends and the completion of our share repurchase authorization.

Our returns to shareholders over the last 12 months totaled $275 million, approximately 11% of our market cap as of yesterday. Earlier this week, the Board authorized a new share repurchase program after we completed our second such authorization since the spinoff two years ago. The new $250 million authorization runs through the end of 2021. Returning capital to shareholders is a key element of our investment story and is enabled by strong cash flows resulting from the synergies of our platform. We are highly focused on maintaining a strong balance sheet, which you will see on Page five of the supplemental materials.

As of the end of the third quarter, the company had committed available liquidity of approximately $719 million in the form of cash and cash equivalents and availability under our various credit lines. At this time, our income tax receivable is $485 million, which gives us greater certainty of cash flow over the next several quarters. This receivable is a direct result of the tax-efficient benefits between our leasing and manufacturing businesses, which, when reinvested through our disciplined capital allocation framework, should generate even greater value for shareholders. We are maintaining significant financial flexibility and remain close to our capital providers. Our committed credit facilities are adequate and our RIV partners have appetite for more assets through our programs.

At the end of the third quarter, the company had $1.4 billion of unencumbered railcar assets on our balance sheet. These railcars can be monetized through leverage or secondary market transactions. We believe our balance sheet and financial strength enables Trinity to navigate the volatility of the COVID-19 pandemic and capitalize on opportunities that may emerge for long-term shareholder value creation. Given the market uncertainty, we are maintaining a very fluid evaluation of our financial condition and business performance based on various scenarios. Market conditions are improving within the railcar industry, but there are still headwinds to overcome to be on a path for a full recovery. These conditions make forecast in our business and giving earnings guidance difficult.

We are committed to providing specific targets for financial performance where we have more control of our performance. As we move into 2021, we will reevaluate the market conditions, and to the extent we can, provide expectations of our financial performance and capital allocation. We believe we are well positioned to respond to a rapid inflection in market demand should conditions improve with a strong balance sheet to defend against lingering market disruption.

In closing, we have put in place a disciplined capital allocation framework with a focus on improving our returns. As part of our Investor Day, we will lay out our expectations for the impact of balance sheet and other optimization efforts on our returns. We believe that through aggressive cost control measures, disciplined capital allocation and selective actions to enhance returns of our owned lease portfolio, we will step Trinity on a path of accelerating our financial performance.

I'll now turn the call back over to Jean for closing comments.

E. Jean Savage -- Chief Executive Officer and President

Thanks, Eric. You know, this is a very exciting time for Trinity, our people, and I believe our investors. While much has been said about the obvious challenges throughout 2020, this year has been a year for tremendous positive change at Trinity. Our work has led us to prepare for a fresh start, a new perspective and a new operating model. In addition to the opportunity to hone our strategy and operating structure, I mentioned in my first earnings call as CEO that I believe there is a real opportunity to accelerate Trinity's position as an industry leader in the railcar market through innovative products and services. We believe the strategy will transition Trinity to a higher-quality, recurring-relationship business model.

The focus of our strategic framework, we will lay out at our Investor Day, will focus on the following themes: one, to optimize the returns and performance of our fleet; two, to reduce the cyclicality of our business model; and three, to increase the modal advantage of the railcar industry. We look forward to discussing these topics and more with you on November 19. And we'll now take some time to answer your questions on our third quarter performance results.

Operator, will you please give our listeners the instructions for the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] And we'll take our first question from Bascome Majors with Susquehanna. Please go ahead, your line is open.

Bascome Majors -- Susquehanna -- Analyst

Yeah. Good morning and thank you for taking my questions. Looking at the average sales price implied in the backlog, it looks like it may have been revalued lower this quarter. Can you speak to that? What's driving that, if that is the case? And maybe any comments on the timing and magnitude of further manufacturing rationalizations that you kind of alluded to in the prepared remarks.

E. Jean Savage -- Chief Executive Officer and President

Okay. For the backlog, it was just an adjustment on material costs that we've seen. And so it wasn't due to cancellations, but just the adjustment on material. For the rationalization of facilities, we mentioned that we have to complete lines in production before we can make any changes. And some of that is people related, some of that is facility related. As we look at our facilities, we look at what workflow we have committed to them. And as we see that either decline or we choose to move that work elsewhere, we'll be able to take actions than to, say, which facilities will remain and are crucial to the ongoing business or which ones that we will go ahead and reduce or take out.

Bascome Majors -- Susquehanna -- Analyst

Okay. On the Leasing business, the margin was higher than it's been historically. And some of that you had alluded to, it's the depreciation reduction from the small cube covered hopper writedown, but maintenance expense also played a pretty big part on that. I'm just curious, on the maintenance front, what's driving that? And how sustainable is this lower run rate as we look forward to the profitability in that business?

E. Jean Savage -- Chief Executive Officer and President

So if you look at year-to-date, our maintenance expense is down about 15%. Some of that is driven from the fact that people aren't releasing the cars. So if you don't have the cars, you can't do the work. Other parts of that due to our being able to do more of that work internally. And when we can do that work internally, we have the ability to lower the cost and improve the turn times. And then the third part of that is the AAR expense. The work that's being done under AAR billing is lower. So that would be more of the running repair-type work, not the planned repair. So all of those combine to have the improvement that you're seeing.

Bascome Majors -- Susquehanna -- Analyst

Do you think any of that is sustainable? Or is it just the number of things coming together in the same quarter?

E. Jean Savage -- Chief Executive Officer and President

I think some of it is sustainable. So as we look again at what we can move in health, we've proven again our cost to do that work in-house is lower. And again, we get the cars turn quicker, so they're out to our customers. And then as far as the AAR, the railroads have reduced manpower throughout their systems. And I think that may be having a little bit of an impact on their ability to do some of the running repairs. There's also -- it's better for everyone if that -- those type of repairs can be done at either the beginning or origination or at the end of those loads. So you're not stopping or disrupting the flow of the traffic.

Bascome Majors -- Susquehanna -- Analyst

Okay. Last one for me. I know you said that we'll get a much more significant capital returns update in a month at your Investor Day. But if I recall from some of the nature of the tax-free spend that you did and are about to have the two-year anniversary on, there were some limitations on your ability to recapitalize the business. You're about to lap that as -- does that give you an opportunity to be more aggressive with perhaps another ASR or some pull forward on this incremental $250 million buyback you just authorized. And maybe even if you can't answer that, I'm curious if the 2021 end date implies that you hope to complete this $250 million by the end of next year.

Eric R. Marchetto -- Executive Vice President and Chief Financial Officer

Sure, Bascom, this is Eric. As far as an ASR goes, we certainly have that ability to do it, but we have not announced anything. But the $250 million authorization is a little shorter window than we've normally put on it, just running out through the end of next year, as you mentioned. And business conditions continue, like we said back in April, when we put out our base case and our stress case, along our base case we expect it to fulfill our last authorization, which we did, we completed this quarter. And so if things continue along that trajectory, then we would expect to complete it. If market changes, we'll adjust.

Bascome Majors -- Susquehanna -- Analyst

Thank you.

E. Jean Savage -- Chief Executive Officer and President

Thank you.

Eric R. Marchetto -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

We'll take our next question from Matt Elkott with Cowen. Please go ahead, your line is open.

Matt Elkott -- Cowen -- Analyst

Good morning. Thank you. Jean, did you say 11,000 deliveries this year? Did I hear that correctly?

E. Jean Savage -- Chief Executive Officer and President

Yes, I said just over 11,000 deliveries this year. Yes.

Matt Elkott -- Cowen -- Analyst

Okay. So I guess the fourth quarter delivery number is just over 1,700. I was wondering how much margin downside is going to come with the lower delivery number. I mean, are we getting -- how -- are we getting into the negative and by how much?

E. Jean Savage -- Chief Executive Officer and President

So we're not giving guidance, so I can't tell you what that margin is going to be. But the work that we have been doing this year, and that we'll talk about in November, is getting the structure in place. So even in a normal down cycle, we won't go negative. We've made some strides on that. You've seen that in the numbers that we're showing you in the supplemental materials. So to help you, we've made a lot of improvements. I just can't give guidance.

Matt Elkott -- Cowen -- Analyst

Okay. So it's plausible that the margin will be fairly stable in the fourth quarter despite the lower deliveries?

E. Jean Savage -- Chief Executive Officer and President

That's plausible, yes.

Matt Elkott -- Cowen -- Analyst

Yes? Okay. And then another question that's kind of a bigger picture industry question. Rail traffic is starting to head in the right direction. And most likely we're going to have rail traffic growth in the foreseeable future that hopefully will be sustainable. But this will be the first time, I think, ever that we have rail traffic growth while all the railroads are implementing PSR. Are you guys starting to get calls from existing or new customers that are concerned about this? Or from your angle -- from your conversations with customers, are you starting to get any sense of disruption in the rail network?

E. Jean Savage -- Chief Executive Officer and President

So Matt, we aren't getting calls from customers with that concern. Right now, I think everyone's just cautiously optimistic that things are moving in the right direction. three straight weeks with year-over-year improvement, something we haven't in the total rail traffic numbers, something we hadn't seen since the beginning of 2019, I think have us all thinking maybe it's going in the right direction there. And then we've had 75,000 cars come out of storage in the last quarter. So that's also a great indicator that things might be heading up, so we may have bottomed and started the upturn.

Matt Elkott -- Cowen -- Analyst

And then if I may, one last question on the guardrail segment. I noticed in your release that part of the reason SG&A declined was lower mitigation risk, and I guess, which may have something to do with the court system disruption due to the pandemic. But I think the overall risk to you guys is pretty much behind you on that front. Now when this whole litigation issue is completely out of the way, would this segment be a consideration for divestiture?

E. Jean Savage -- Chief Executive Officer and President

We have talked in the past about the fact that when the timing was right, we would look at possibly divesting the highway business to the right partner. So is it on the table still? Yes, we would consider that. We just have to make sure that it makes sense for us in the marketplace. And as you mentioned, the litigation is in a point where that can happen.

Matt Elkott -- Cowen -- Analyst

Got it. Thank you very much, Jean.

E. Jean Savage -- Chief Executive Officer and President

Thank you.

Operator

We'll take our next question from Gordon Johnson with GLJ Research. Please go ahead, your line is open.

James Bardowski -- GLJ Research -- Analyst

Good morning, everyone. This is James Bardowski in for Gordon. You -- for your balance sheet optimization, I know previously you were targeting about 60% to 65% leverage. You reported 57.9% last quarter. Is there any change to that prior leverage target?

Eric R. Marchetto -- Executive Vice President and Chief Financial Officer

James, Eric Marchetto. No, we've talked about that 60% to 65% target. We have not changed that target. We're currently, as you mentioned, right around 58%. The capital markets are very attractive right now, as I said in my prepared comments. So we will -- we just closed on a transaction earlier this week, as I mentioned. And we're -- we will continue to evaluate those markets.

James Bardowski -- GLJ Research -- Analyst

Okay. Great. And also, I remember you guys mentioned it in the second quarter press release as well, but you raised your maximum leverage covenant. Can you just quickly remind us to what the new target is?

Eric R. Marchetto -- Executive Vice President and Chief Financial Officer

So we didn't disclose what the new target was, but we did adjust our covenants as we put out our base case and our stress case scenario back in April. When we looked at the stress case, we look to mitigate items. And one of the things that we wanted to make sure was that we had ample liquidity. So we worked with our corporate revolver banks and amended that covenant that will run for the -- through 2021. We thought that was a good inexpensive insurance policy in the case we got into a stress environment.

James Bardowski -- GLJ Research -- Analyst

Okay. That's helpful. Very helpful. And also you guys mentioned that this new Midwest facility will likely be a headwind to your margins. I know this is kind of reaching into the guidance realm, but do you have any idea of -- or can you give us any idea of what the magnitude of that headwind might be or how long it could last?

E. Jean Savage -- Chief Executive Officer and President

So this is Jean. In my prepared remarks, I did say that the facility would be accretive in 2021. So it's just the fact that you have to ramp up the facility, make sure that you get the volumes and the training to cover all the cost. And that is probably as far as I can go without giving any guidance.

James Bardowski -- GLJ Research -- Analyst

Yes, that's fair. That's fair. And then I'll just ask one more, and then I'll hand it off. Last quarter, you guys had about 40% of your backlog you expected to be recognized this year, which is kind of basically on point with the 11,000 shipments you just guided today. So is it safe to say that the 2,000 orders you received is for next year? Can you just talk a little bit about the mix of these orders? You mentioned earlier that the transactions are more complex. But then when we look at the value of the orders, it's down roughly 30% year-over-year. So where are you seeing the real value here?

E. Jean Savage -- Chief Executive Officer and President

So when you look at that, when I'm talking about complex, it's our ability to work with some of these customers and maybe take some car types they don't need any longer back into our fleet that we can put back out and lease, provide them with a new car build and management possibly or maintenance for those cars. So it's coming up with a transaction that's more than just a car sale. And that's where I talk about complex. The 2,000 cars that we did get, where -- a lot of what we talked about in the second quarter came through, but there was also a mix of some other cars.

James Bardowski -- GLJ Research -- Analyst

All right. Well, thanks. Thank you for your time everybody.

E. Jean Savage -- Chief Executive Officer and President

Thank you.

Operator

We'll take our next question from Allison Poliniak with Wells Fargo.Please go ahead, your line is open.

Allison Poliniak -- Wells Fargo -- Analyst

Hey guys, good morning. So I just want to talk to the cost opportunities. You've been really aggressive on the cost reduction activities, which makes sense. But as you look -- you're evaluating some, I would say further opportunities, should we think they're more cyclical in nature here? Or are just because of the volume declines and such are some more -- I guess, greater structural opportunities becoming available to you. Any color there?

E. Jean Savage -- Chief Executive Officer and President

So we are looking at both. But I would say in the structural side of it, we've got work going on to make sure that we're keeping the higher value-added processes in our facilities and either subcontracting or going to supply base for some of the lower value add. As that work happens, that will transition out of our facility. That will be more of a structural cost reduction for us. And then as we look at potentially getting rid of some nonoperational facilities or selling them, that's also going to be a structural move for us. So we've got our eye on any cost opportunity that we see, and we're carefully bucketing them between what could be structural and what may be cyclical. We want to position ourselves. We keep talking about a lower breakeven point and making sure that as we go through a cycle. We can get our margins in a more controlled manner or range. And we'll talk more about that in November.

Allison Poliniak -- Wells Fargo -- Analyst

That's helpful. And I would say, I know you're going to talk about it a little bit more in November in terms of the manufacturing and kind of lessening that variability. I guess within that, are you sort of narrowing your focus on what you'd be willing to build as a result?

E. Jean Savage -- Chief Executive Officer and President

So what we're doing is we still have a broad range. We're building for ourselves and for third parties. We expect to continue to do that. It's just the way that which we build. Again, by doing some of that outsourcing, we'll have the need for fewer headcount to produce the same number of cars that we produced in the past. As we look at our indirect and direct material costs, or services that we get and bring those costs in. Everything we're looking at is helping us to lower those costs and making sure as we go through an upturn, we don't go through a high increase in our cost structure to make that happen.

Allison Poliniak -- Wells Fargo -- Analyst

Understood. Helpful. Thank you very much.

Operator

We'll take our next question from Justin Long with Stephens. Please go ahead, your line is open.

Justin Long -- Stephens -- Analyst

Thanks and good morning. So I wanted to ask about the lease fleet eliminations. If you look at the implied margins there, last quarter, they were about 7% versus Rail Group margins that were about 2%. In the third quarter, if you look at the implied margins on those lease fleet eliminations, they fell a good amount to 1.6%, and that was closer to what we saw in the Rail Group. Was that gap closing just a function of mix? And maybe you could just talk about how you expect that gap to trend going forward, should those numbers trend more in line?

Eric R. Marchetto -- Executive Vice President and Chief Financial Officer

Justin, this is Eric. The short answer is, yes, they should. Let me explain a little bit. So when we sell railcars -- or when we transfer railcars from our manufacturing segment to our leasing segment, we transfer those in market. So if it's the same mix, then the margins should be very similar on the eliminations versus the rail segment, considering -- there's other things that go into that, the lease rates, etc. The car types, etc. But generally speaking, those should move in tandem.

Justin Long -- Stephens -- Analyst

Okay. And it sounds like going forward, you're not anticipating any major differences in mix between what you're delivering externally versus internally for the lease fleet.

Eric R. Marchetto -- Executive Vice President and Chief Financial Officer

Going forward, we're not providing any guidance, but again, if mix were -- if you control for mix, they should be in line with -- the elimination margin and the segment margin should certainly be in line. There's other things in that segment margin, such as your maintenance services and other things, but the lion's share was going to move in line with the rail segment margin.

Justin Long -- Stephens -- Analyst

Okay. Got it. That's helpful. And there was commentary around the expectation for deliveries this year. But if we look at the backlog today, could you talk about how many units are locked in for 2021 at this point? And just in terms of margins, I know you're not giving specific guidance, but when you look at those 2021 deliveries that are locked in, directionally, do you think margins can be up versus what we've seen in the past couple of quarters?

E. Jean Savage -- Chief Executive Officer and President

So we're not giving guidance, so I really can't tell you the number of units locked in. But I will talk to you again about the fact of the work that we've had going on this year that we'll continue, and we'll talk about in November, for reducing our overall cost structure. And when you reduce that cost structure, that should allow you to have higher margins that are coming out of that. So if we continue along the path that we've been on, and we've been sharing with you what our goals are, our expectations, and then we share with you when we pass those. And even in the release that just came out, we talked about, we've hit the $80 million, which we told you was going to be $70 million, and we're not done yet. So we'll continue to look at how we can improve those margins. And not just for the short term, not just for the down part of the cycle, but how we're going to be able to change our methods and modes to be able to help the overall cycle performance.

Justin Long -- Stephens -- Analyst

And just one last quick one. You mentioned the number of railcars in storage coming down. Do you have a view on where that percentage of cars in storage needs to go before we get to more of a replacement demand level for new railcars?

E. Jean Savage -- Chief Executive Officer and President

So what we need to do is get the -- moving railcars up to about 85% or around that mid-80s, 85% to 87%. When you have that many running, you're going to see a lot more new railcars coming out. And just a little other color for you, besides railcars coming out, we've had some scrapping of railcars this year. And through the third quarter, there were 40,000 railcar scrapped. If you use that run rate through the end of the year, that would put between 50,000 and 55,000 being scrapped. And the delivery expectations for this year, according to third-party, is about 31,000. So we're going to actually see a net reduction in the fleet size this year, and that contraction has not happened in the last 10 years. So that's also a benefit for getting some cars out of the system and then opening up the need for new railcar deliveries.

Justin Long -- Stephens -- Analyst

That's a good point. I appreciate the help. Thank you.

E. Jean Savage -- Chief Executive Officer and President

Thanks.

Operator

We'll take our next question from Steve Barger with KeyBanc Capital Markets. Please go ahead, your line is open.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Hey, good morning. Jean, you said you expect to transform rail shipping in the future. That seems like a pretty bold statement. Can you talk a little more about rail pulse or how fleet analytics will transform the industry?

E. Jean Savage -- Chief Executive Officer and President

Sure. We've talked in the past about the fact that PSR is really focused on just one railroad in their line and what they can do. And in order to really affect that supply chain, we've got to get across the entire system, ecosystem, which means across railroads, across different lessors, being able to see that information and the shippers to be able to make smart decisions and to be able to overcome some of the hurdles that is stopping them from going from the trucking mode into the rail mode.

Steve Barger -- KeyBanc Capital Markets -- Analyst

So really, this would be you from the car side trying to help the Class 1s with system fluidity or just being able to get better asset utilization.

E. Jean Savage -- Chief Executive Officer and President

It's not just the railroads on that. They do play a part. It's really helping the shippers. Because once the shippers are confident in their supply chain and that they're going to be able to maintain the inventories at a level that they can sustain and not worry about getting product in on time so they have that utilization of overall assets being the highest, the better off we're all going to be in the industry.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Right. I can anticipate what people are going to ask, which is if you increase system fluidity, doesn't that imply that you need less equipment over time?

E. Jean Savage -- Chief Executive Officer and President

It could mean that. The other thing is that railroads continue to push out their portion of the railcars. And if we increase modal share, that would be a great way to increase the number of railcars that are needed. It's more sustainable. We really have to keep getting that message out there. As far as the mode of transportation other than shipping, rail is the second best sustainable method for getting products around the U.S. So we really need to make sure people understand that, especially as they're talking ESG.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yes. Understood. And you talked about the net reduction in fleet size this year. And over the past few quarters, you've talked about expecting to take market share. I'm just curious what you think the trajectory of the railcar fleet itself will be over the next few years. I guess do you take the over or the under on the current fleet of 1.7 million cars?

E. Jean Savage -- Chief Executive Officer and President

Wow, that -- I haven't thought about that one. That one may be a little tough. I will say that I expect or we're expecting for next year that you might see a contraction or more railcars getting scrapped than new railcars getting delivered. Past that, I don't know that I'm prepared to answer. We may be able to follow up.

Eric R. Marchetto -- Executive Vice President and Chief Financial Officer

Steve, I'd just add that when you look at the flammable fleet with the regulations that came out, there's going to be some retirements that have to happen in that fleet that would be relatively early relative to a 50-year car life. So you are going to have a bit of a rightsizing event as those regulations -- as the end dates come to those regulations, which is 2023 for ethanol, and 2025 and 2029 for other flammable products. So that will force a little bit more attrition than what historically would have been normal.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yes, that's exactly what I was going toward, is -- you're going to have some flammable cars come out, you probably have some sand cars which are maybe permanently impaired. So you'd need mid-single-digit fleet growth to be flat, maybe 10% growth to show a meaningful upside. So the question is what -- which categories of cars could expand to offset that kind of reduction that we're talking about?

Eric R. Marchetto -- Executive Vice President and Chief Financial Officer

Well, I think you're still going to have -- I mean, it all is a function of industrial production and where industrial production grows, and that's what -- some of the things that we're looking at as North America -- as some things and the onshoring that may happen if that continues, then you'd have increases in industrial production, and you're going to see that -- we think rail will be well served to serve industrial production, especially if we can get the modal share growth. And then you can take -- one of the good examples there is on -- is whether it's agricultural and food type products, and a lot of that moves by truck now. And if we can successfully move more of that to rail then that -- there's an opportunity for growth.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Appreciate it. Looking forward to the 19. Thanks.

Eric R. Marchetto -- Executive Vice President and Chief Financial Officer

Great.

Operator

And there are no further questions on the line at this time. I'll turn the program back to Jessica Greiner.

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

Thank you, David. As Jean mentioned, we look forward to engaging with you all again in four weeks' time at our upcoming Investor Day on November 19. Registration for the webcasted event is now open and can be found on the Events & Presentations portion of the website. Also, please note, we expect Trinity will file our Form 10-Q within the next week. If you have questions on the company's quarter financial results press release, I'm happy to follow-up with you. A replay of today's call will be available after 1:00 Eastern Standard Time through midnight on October 29, 2020. The access number is 402-220-1140. A replay of the webcast will also be available under the Events & Presentations page on our Investor Relations website located at www.trin.net. That concludes today's conference call. Thank you for joining us this morning.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

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

E. Jean Savage -- Chief Executive Officer and President

Eric R. Marchetto -- Executive Vice President and Chief Financial Officer

Bascome Majors -- Susquehanna -- Analyst

Matt Elkott -- Cowen -- Analyst

James Bardowski -- GLJ Research -- Analyst

Allison Poliniak -- Wells Fargo -- Analyst

Justin Long -- Stephens -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

More TRN analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.