Q1 2023 Trinity Industries Inc Earnings Call

Participants

E. Jean Savage; President, CEO & Director; Trinity Industries, Inc.

Eric R. Marchetto; Executive VP & CFO; Trinity Industries, Inc.

Leigh Anne Mann; VP of IR; Trinity Industries, Inc.

Bascome Majors; Research Analyst; Susquehanna Financial Group, LLLP, Research Division

Jacob Moore; Research Analyst; KeyBanc Capital Markets Inc., Research Division

Justin Trennon Long; MD & Research Analyst; Stephens Inc., Research Division

Matthew Youssef Elkott; Director and Transportation, OEMs & Technology Analyst; TD Cowen, Research Division

Presentation

Operator

Good day, and welcome to the Trinity Industries First Quarter Ended 31st March 2023 Results Conference Call.
(Operator Instructions)
Please note, today's event is being recorded.
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 of the business issues and risks, a change in any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.
I would now like to turn the conference over to Leigh Mann, Vice President of Investor Relations. Please go ahead.

Leigh Anne Mann

Thank you, operator. Good morning, everyone. We appreciate you joining us for the company's First Quarter 2023 Financial Results Conference Call. Our prepared remarks will include comments from Jean Savage, Trinity's Chief Executive Officer and President; 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 reference slides highlighting key points of discussion as well as certain non-GAAP financial metrics. The reconciliations of the non-GAAP metrics to comparable GAAP measures are provided in the appendix of the supplemental slides, which are accessible on our Investor Relations website at www.trin.net. These slides are under the Events and Presentations portion of the website, along with the first quarter earnings conference call's webcast link.
A replay of today's call will be available after 10:30 a.m Eastern Time through midnight on May 9, 2023. Replay information is available under the Events and Presentations page on our Investor Relations website.
It is now my pleasure to turn the call over to Jean.

E. Jean Savage

Thank you, Leigh Mann, and good morning, everyone. I'll start on Slide 3 to talk about our key messages from today's call, which we will expand on later in our prepared remarks. Our first quarter GAAP EPS from continuing operations was $0.09, and adjusted EPS from continuing operations was $0.07, up $0.04 year-over-year. We ended the quarter with our future lease rate differential, or FLRD, at 44.3%. The FLRD calculates the implied change in lease rates for railcar leases expiring over the next 4 quarters by applying the most recently transacted quarterly lease rate for each railcar type, and our lease fleet utilization improved this quarter to 98.2%, reinforcing that the railcar market remains tight.
We are reconfirming our 2023 EPS guidance of $1.50 to $1.70. We are confident in our ability to achieve these results as we look forward in 2023. We expect to see segment operating margins up significantly as we take advantage of the operating leverage of the business, manufacturing backlog and strong railcar lease environment. And finally, in the first quarter, we completed our acquisition of RSI Logistics, a data-centric provider of proprietary rail logistics software and management solutions. I'll discuss this acquisition and how it fits into our digital strategy later in my prepared remarks.
And now let's turn to Slide 4 for a market update. Starting on the top left, despite intermodal pulling down rail traffic, carloads are up almost 4% year-over-year. We're encouraged to see that rail service issues appear to be improving with higher train speeds and shorter dwell times. But overall performance still has room to improve. Near-shoring activities, trucking labor headwinds and heightened interest in ESG continue to foster pent-up demand for rail transportation. Even as railroad service continues to improve, the pent-up demand will continue to drive more rail volume despite uncertain macroeconomic conditions.
Moving to the top right graph, the continued railroad service headwinds are keeping populations of the North American railcar fleet out of storage. At the beginning of April, the AAR reported that more than 82% of the fleet was active, representing a meaningful month-over-month and year-over-year improvement. Covered hoppers, primarily for agricultural markets and open hoppers for construction materials, metals and coal have seen the greatest recent improvement. It's also worth noting that tank cars are at the lowest level of storage since this metric began in 2016.
Moving to the bottom of this slide, positive commercial momentum continues for our lease fleet. I have already mentioned that our FLRD is above 44%, which is a significant step up from last quarter. What we find especially encouraging is that we see improvement in virtually all railcar types in our fleet. The highest increases are coming from our tank car fleet, which has lagged the freight car recovery in recent years. Our lease fleet utilization improved to 98.2%, and we remain optimistic about lease rate growth in the coming quarters given the tight existing railcar market, higher interest rates, and the current inflationary environment.
Furthermore, as we lock in substantially higher lease rates, we are also increasing the term of the leases, which gives us confidence in longer-term revenue generation. We delivered 4,045 railcars in the quarter and received orders for 2,690. We exited the first quarter with a backlog of 30,915 railcars valued at $3.7 billion. Inquiry levels remain supportive of replacement level demand over the next several years, especially in several key railcar fleets, including covered hoppers, gondolas, auto racks and boxcars. We have been selective in our go-to-market strategy in order to maintain steady manufacturing performance through the cycle.
Furthermore, this recovery has been supply-led, which has made for a stable market driven by replacement-level demand.
Slide 5 shows the first quarter performance year-over-year. Our quarterly revenue of $642 million was up 36% compared to a year ago. And our first quarter adjusted EPS of $0.07 was up 133%. While our cash flow from continuing operations in the quarter of $103 million was up 260%, our adjusted free cash flow of $36 million was down 24%. Many moving pieces drove these numbers and the timing of railcar sales create variability in free cash flow. I want to start by talking about segment performance, and later, Eric will discuss cash flow.
Please turn with me to Slide 6 for segment results, starting at the top with the Leasing segment. Leasing segment revenue in the first quarter of $204 million reflects improved renewal rates and higher utilization. Our renewal success rate of 80% in the quarter increased utilization and the high FLRD are evidence that market rates are rising and customers are holding on to their railcars and understand the economics of a tight market with elevated interest rates and rising lease rates. Our FLRD has been positive for 7 consecutive quarters. And as we continue to raise lease rates, we expect continued revenue growth in this segment.
Leasing and management operating profit margins were 35.4% in the first quarter. Margins were slightly down sequentially due to increased maintenance expense as well as depreciation expenses because of higher sustainable railcar conversion activity. Remember, sustainable railcar conversions are a cash-accretive action for Trinity as they extend the useful life of assets at attractive returns on invested capital. We expect leasing margins to improve as lease rates push upwards and these expenses stabilize.
In the Rail Products segment, quarterly revenue was slightly down sequentially due to a lower volume of deliveries compared to the fourth quarter. However, segment revenue was up 63% year-over-year, reflecting significantly higher deliveries and manufacturing. Our operating margins in the Rail Products segment came in at 4% in the first quarter, an improvement sequentially and year-over-year. However, these margins are still lower than we would like and reflect a challenging labor environment.
The accelerating pace of hiring and onboarding has affected productivity given the volume of new employees and the need for training. While these issues, along with continued rail service and supply chain issues, continue to affect us through the first quarter, we see improvement across the board. We are optimistic that we are through the worst. All that to say, we expect to see operating margin improve substantially through the year and expect high single-digit margins in this segment.
Turning to Slide 7. We remain focused on our strategic initiatives. And this quarter, I want to highlight the work we're doing to improve the rail supply chain. As I mentioned at the top of the call, we completed our acquisition of RSI Logistics, a data-centric provider of proprietary software and logistics and terminal management solutions to the North American rail industry. We are excited about this acquisition and the capabilities it gives us. I want to step back and talk about our rail services journey and how this acquisition fits into the future state of our business. Please turn to Slide 8.
Our proprietary Trinsight platform was enhanced with our acquisition of Quasar last year. These businesses give us access and insight into unique data and analytics about railcars, including assets' health, shipment condition, location and yard management. The RSI Logistics acquisition added a full suite of logistics capabilities to our digital portfolio, including shipment execution software and services to efficiently manage rail logistics, transloading and warehousing solutions.
Our goal is to help our customers optimize their supply chain by making shipments more visible as data real time and easily accessible. We are creating an end-to-end platform to help our customers safely, efficiently and predictably bring their products from the port of origin to the point of use. We are working with industry leaders and channel partners toward broader network integration and optimization through initiatives like Rail Pulse. Customer feedback on the RSI acquisition has been very positive. Specifically, their transloading and turnkey rail logistics solutions are seen as leaders in the industry, giving our customers an enhanced offering all in one place.
We look forward to continuing the integration of this business into Trinity as we work toward a better digital solution for rail shippers. Eric will talk about full year expectations in a minute, but I wanted to close by talking about some of the key themes we are seeing that keep us optimistic. We significantly ramped up hiring in the fourth quarter of 2022 and the first quarter of 2023, and are spending time training those employees. We believe labor has largely stabilized, and we expect substantial efficiency improvement with a more experienced employee base in the second half of the year.
The rail services issues that plagued us in 2022, specifically around the border, have largely been resolved. And while there's still some variation in our supply chain, we have learned to operate through it and do not view this as a significant issue in the future.
We expect revenue to improve on both sides of our business with higher deliveries and lease rates. We expect margin improvement on both sides of our business with better efficiency and moderated maintenance expenses. While our first quarter results were dampened, the fundamental strength in our industry is evident, and we are excited about the year ahead as those trends persist, and we see an easing of the headwinds.
And finally, since we last spoke in February, I'm proud to report that Trinity has released our 2022 annual report and will soon file our 2023 Corporate Social Responsibility report. Regarding our CSR report, we made progress as a company, and I wanted to preview a few highlights of the report with you today. First, we've achieved our third-party limited insurance of Scope 1 and Scope 2 greenhouse gas metrics. Also, for the first time, we are tying executive compensation to environmental metrics like year-over-year energy reduction and water usage.
Diversity, equity and inclusion metrics will continue to be connected to compensation as well. Our CSR report has excellent information, and I encourage you to check it out and hold us accountable for continued improvement.
In terms of safety, we have reduced our nonfatal occupational injuries and illnesses by 27% over the last 3 years. I'm proud to say that by putting safety first and always focusing on continuous improvement, we are now 40% better than the industry.
And now I'll turn the call over to Eric to review our financial results.

Eric R. Marchetto

Good morning, everyone. Please turn to Slide 9, where we will discuss consolidated financial results. In the first quarter, revenue of $642 million improved sequentially year-over-year due to higher external railcar deliveries and improved pricing. Our adjusted earnings per share of $0.07 was up year-over-year but down sequentially due to lower lease portfolio sales in the first quarter.
Lease portfolio sales were $57 million in the first quarter with a gain of $14 million. Our earnings were aided by a 217% tax benefit. Several moving pieces affected our tax rate in the quarter, and I'll discuss those briefly. In our trip leasing subsidiary, we released stranded tax assets previously recorded in AOCI and recorded an income tax benefit of $11.9 million, $7.5 million of which relates to noncontrolling interest. This results in a net $4.4 million positive impact on net income.
Our tax rate also benefited by a $4 million change in valuation allowances. These items were partially offset by a remeasurement of net-deferred tax liabilities due to the RSI acquisition, resulting in an increase in deferred tax expense of $3.2 million in the quarter.
Moving to the cash flow statement. Our cash flow from continued operations in the quarter was $103 million, and adjusted free cash flow was $36 million after investments and dividends. We did not repurchase any shares in the quarter, but paid $21 million in dividends. In terms of investing activity, our fleet additions totaled $192 million, including deliveries, modifications and secondary market additions, offset by lease portfolio sales of $57 million, bringing our net fleet investment in the quarter to $135 million.
Lease portfolio sales were low in the quarter, and we expect this number to being fairly lumpy through the year, but we are on track for our net fleet investment full year guidance of $250 million to $350 million. Our investment of $7 million in manufacturing and general capital expenditures is also on pace for our full year guidance.
Turning to Slide 10. We currently have liquidity of $451 million, which includes cash and equivalents, revolver availability and warehouse availability. In the first quarter, we amended our revolving credit facility to increase the total facility commitment from $450 million to $600 million to enhance our liquidity and flexibility.
We are maintaining higher working capital, which will be necessary to support higher levels of deliveries and the current supply chain landscape. Higher interest rates have impacted our debt profile. Our debt remains approximately 80% fixed rate, but the impact of higher short-term rates, along with higher debt balances has increased our interest expense over the last year. In the first quarter, net interest expense of $62 million was up $19 million year-over-year, and we had headwinds to our earnings this year.
And finally, our loan to value for the wholly owned lease portfolio is 65%, in line with our target range. I'll conclude my prepared remarks on Slide 11 with our outlook and guidance. Our outlook remains relatively unchanged from our fourth quarter call. We view North American industry deliveries in the range of 40,000 to 45,000 railcars, representing replacement-level demand. We expect a net lease fleet investment of $250 million to $350 million for the year, in line with our 3-year target. We expect manufacturing and general capital expenditures of $40 million to $50 million for the year, representing investments in safety, efficiency and automation. We expect to achieve our revised 3-year cash flow from operations target of $1.2 billion to $1.4 billion.
And finally, we are affirming our 2023 adjusted EPS from continued operations guidance of $1.50 to $1.70 per share. Given that we reported $0.07 in the first quarter, we believe that this guidance shows that we expect meaningful improvement in our Rail Group margins in the second half of the year and continued lease rate increases in the Leasing segment.
In conclusion, as we have increased deliveries over the last several quarters, we have not been able to achieve the necessary efficiency levels to get the margins we expect.
As more of our employees are onboarded and trained, we expect to see that efficiency improved and financial results to reflect that as the year progresses. As we said last quarter, improvement does not happen overnight, but the work we have done to attract, train and retain our workforce will be visible in our results as the year progresses, and we look forward to sharing our progress with you. And now operator, we are ready for the first question.

Question and Answer Session

Operator

(Operator Instructions)
Our first question comes from the line of Justin Long from Stephens.

Justin Trennon Long

Maybe to start with a question on Rail Products Group margins, Jean, I think you said that the guidance was for high single-digit margins. I wanted to clarify that, that was a full year 2023 guide. And if so, maybe you can help us think about the quarterly cadence.
Eric, a moment ago, I think you made a comment that margins would improve in the second half. So I just wanted to understand, are you expecting sequential improvement in margins in the second quarter? And then maybe where we go in the second half in order to get to that high single-digit target?

E. Jean Savage

Great question, Justin. Let me talk a little bit about the progression of the year to help you understand what we're seeing. So in the first half of the year, in Rail Product, we have 2/3 of the year's changeover occurring. First quarter, we had about 1/3 of those. So we also talked about being able to hire finally in the first quarter. That was really great. We have the people we need now to get the throughput we need, but it also presented the training headwinds. If you look at our top 2, our largest plants for manufacturing, 20% of the workforce has less than 6 months. Typically, they're in training for 3 months and then you're ramping on the efficiency for at least the next 3 months. So we expect to see that continue into the second quarter as some of those people will stay in training or getting up to speed.
In the first quarter, good news, we saw some rail service and supply chain improvements, which is great. We expect that to continue into the second quarter. And again, in the first half, we expect more cars to deliver into our fleet, and you'll see more of that in the second quarter.
Looking at the second half of the year in Rail Products, we're going to have the remaining 1/3 of the changeovers. And it's a few less in the third quarter than fourth, but fairly even there on that. We're also looking at -- to maintain better rail service, the supply chain continuing to improve and more importantly, that training complete and the efficiency still ramping up. So I would expect improvement through the year. I would expect the second half to be much greater than the first half.
Does that answer the question, Justin?

Justin Trennon Long

That's a lot of helpful detail. And given the first quarter was roughly 4%, to get to that high single-digit full year target, it suggests the exit rate might be above the high single digits? Is that fair?

E. Jean Savage

So I would say with high single digits overall for the number that we're looking at to exit the year with.

Justin Trennon Long

Okay. Got it. And then maybe as my follow-up for Eric, there was a lot of noise on the tax rate, and you walked through some of the puts and takes there. But I guess, one, I'd like to know why you felt that should be included in the adjusted number? And then maybe any color you can give us on the tax rate going forward? And in addition to that, we love some thoughts on gains on sale going forward, too.

Eric R. Marchetto

Yes. So Justin, I think we -- I didn't walk through all the pieces of the kind of 3 elements of it. And while those were not included in our forecast for the year, and our guidance, we did include them in our -- we did not adjust them out. We felt that they were related to our core business, and so we didn't adjust them out. In terms of -- and also note because a lot of that -- a lot of the benefit came out through minority interest and so the net impact for the quarter was not as great as the headline might indicate because of it coming out in minority interest.
In terms of car sales, so we had modest car sales in the first quarter. Reminder, we still have year 3 of our Wafra program in place, which likely will be in the second half of the year. The market for -- secondary market still remains relatively good. We're active in the market, both as buyers and sellers, and we see opportunities. We see opportunities both on the buy side and the sell side. And so I would characterize it as pretty healthy. You might think because of higher interest rates, that would have cooled off the market. I think what we see is that buyers are priced in future lease rate increases, and therefore, you're assuming that lease rate inflation continues. And so that has supported valuations recently that we have seen their support going forward.

Operator

Our next question comes from the line of Bascome Majors from Susquehanna.

Bascome Majors

You're talking about getting your labor force slowly up to speed and your desired productivity, but you're facing off against a moderately weakening railcar order environment. So I just wanted to walk through the contingency or the ability to avoid reducing the labor force in an environment where maybe railcar production needs to fall later this year or early next year and then having to go back and backfill yet again after the challenges of hiring in Northern Mexico over the last 2 or 3 quarters?

E. Jean Savage

So as we look at the workforce right now, Bascome, what we're seeing is we've got the majority of all of our space filled for this year, taking orders into next year. So the people we have will help us, one, reduce over time as they come in and they're more efficient so that lessens that headwind. And as we get them trained, we're still seeing inquiry levels consistent with our belief of replacement demand for the railcars that are going to be needed. So even though you might see some fluctuation, we don't believe you're going to see the high peaks and valleys that we've seen in previous cycles. We think this one is going to be a little flatter, which will help us maintain that workforce and not have to go through the cycle of retraining again.

Bascome Majors

Okay. So it sounds like at least into early next year, you have very good visibility into a fairly steady production cadence?

E. Jean Savage

That's correct.

Bascome Majors

And just to clarify Justin's question, the mid-single -- I'm sorry, the high single-digit margin comment, that was an exit rate and not a full year number. I just want to clarify there.

E. Jean Savage

The full year is a high single-digit number. The exit rate will be stronger than the entry rate.

Bascome Majors

Yes. Understood. And lastly, the lease rate differential number was considerably strong. I want to bring some more attention to that. You mentioned tank cars in the prepared remarks. Can you walk us through in a little more granular detail? How is that ramping up so quickly? How sustainable is that level of renewal price increases? And are there any quirks about the first quarter that really juiced that number versus where we should think that might settle in the second half of the year or something?

E. Jean Savage

Sure. So when we look at this recovery, it's really supply-driven. And we're seeing increases in interest rates, new car costs are higher, and we don't see that coming down anytime soon, the interest rates or even the car prices because it's really stabilized. So those will support the higher rates for longer. Some of the reasons we believe that is the FLRD at the 44.3%, the fact that the utilization went up to 98.2%, and the fact that our lease term actually extended in the first quarter.
In 2022, we averaged about 47 months and the first quarter of this year, it extended out to 61 months. So what's that telling us that market is still tight, that they still really want those cars that are out there existing. And when we look at new car prices as compared to our leased or existing cars, there's still a fraction on the lease pricing. So there's a lot of headroom between the new car price and that -- new price rate and the existing car rate.

Operator

Our next question comes from the line of Matt Elkott from TD Cowen.

Matthew Youssef Elkott

My first question is on demand environment. We saw some of the rails starting to do park locomotives, UNPs, parking, 100 CSX might do something similar. I know that the rails have, in past cycles, returned some railcars as well when they come off leases. Are you guys seeing any signs that the railroads might be contemplating similar steps with railcars as locomotives as their traffic remains stubbornly low?

E. Jean Savage

Okay. Well, Matt, I'm going to start out with the non-intermodal volumes are still up year-over-year and really being driven with automotive, agriculture, energy still there. The headwinds are really the intermodal and chemical. I think you know that we are not exposed on the intermodal for our lease fleet at all and that is definitely helping us. We've not heard or seen actual request to return. We're actually still seeing very strong inquiries and the railroads are a big part of that.

Matthew Youssef Elkott

That's helpful, Jean. And then just staying on the demand front, service is improving. I mean by many measures, it's still below 2019 levels, but it looks like it's heading in that direction, in the right direction for the rails. And I know that's a tailwind, that's a good thing for you guys long term, but we all know that in the intermediate term, it can be a headwind to equipment demand. You couple that with the fact that traffic in general is down, I mean, are you surprised that lease rates are holding up as well as they are? Just any kind of sense you have on what demand might look like going forward?

E. Jean Savage

Okay. What we still believe there's pent up demand for the rail traffic loads that want to go on to rail that have not been able to. We're encouraged by the railroads improving their overall service metrics. We're also encouraged. I don't know if you saw the trains magazine article that talked about incentives going in at NS, CSX and UP, with the shift towards growth.
I think you're hearing that talk a lot more, and we don't think that will come to fruition overnight, but we think that will help in the long term. And when you look at overall, the pricing for leasing, we're not surprised. Again when we look at the cost of a new car and what those rates will be, still a lot higher, a lot of headroom from the existing lease freight prices. So we expect that delta to continue to come down and those prices to get closer.

Matthew Youssef Elkott

Okay. And one last follow-up on the secondary market front. I mean, I think, Eric, you talked about the market continuing to be strong. Given the liquidity issue in the banking sector and the banks trying to boost their balance sheets, do you think some of the bank-owned fleet, whether large or small, may be more likely to go for sale in the next couple of quarters?

Eric R. Marchetto

Matt, I don't know. There's certainly been rumors of deals in the market. At the end of the day, it comes down to you need a willing buyer and a willing seller. And I think when you look at those assets in the bank-owned portfolios, I think, generally, you're going to see those assets are improving and the yield on those assets are improving. So the need to -- the ability to wait it out is probably there because they're going to benefit from the same things we're talking about in terms of higher lease rates. And so I think it depends on what they decide to do. But in the meantime, I think they're going to benefit from higher yields on those assets.

Matthew Youssef Elkott

But do you guys have like a sweet spot as to how big of a fleet you might go -- you might be interested in? Or is there -- is size not necessary?

Eric R. Marchetto

We don't have any stated goals. I think we have scale. Our fleet of roughly 110,000 railcars on our balance sheet provides scale. And it comes down to allocating our capital and improving the returns of the business. I think when we've talked over the last several years about modest fleet growth, I think that's still what we're looking to do. If there was something that came along, that doesn't mean we're not interested. It's just that it's going to be at the right return.

Operator

(Operator Instructions)
Our next question comes from the line of Steve Barger from KeyBanc.

Jacob Moore

This is Jacob Moore on for Steve this morning. My first question, just as a sort of a follow-up to a previous question. We saw first quarter industry orders yesterday annualized around 33,000. So I'm just curious, as you sit here about a month in, how would you compare 2Q to date to 1Q in terms of order inquiry activity?

E. Jean Savage

So the inquiry activity still remains consistent with our belief of replacement demand. And a lot of that is driven by certain car types. And I will say that certain customers or some customers are delaying the decision to go ahead and place the order as they look at the macroeconomic uncertainty. But again, overall, the inquiries would support the replacement demand for us.

Jacob Moore

Okay. Got it. And then for the second question, going back to the Holden acquisition, if I read the 10-K correctly, there wasn't much in the way of physical assets in that acquisition, maybe some backlog. So my question is, what assets did you buy? And could you -- or would you be willing to provide us with trailing 12 months revenue and EBITDA?

Eric R. Marchetto

So yes, Jacob, you're right. There are not a lot of assets on the business. That was a capital-light business that had some very attractive proprietary products supporting the auto rack market. In terms of breaking out individual performance, at this time, we're not going to break out the individual performance. It was a relatively small acquisition, but we think it's something that will complement our parts business and continue to grow. And as it becomes more meaningful, then we'll talk about it more going forward.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Jean Savage for any closing remarks.

E. Jean Savage

Well, thank you, and thank you again, everyone, for joining us this morning. We believe 2023 is going to be a great year for Trinity, with significant improvements through the year in terms of revenue and operating profit in both our operating segments. We do have a talented and motivated workforce, and we look forward to sharing our progress with you through the year. Thank you again for your continued support.

Operator

Thank you. The conference of Trinity Industries has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.