FreightCar America Inc (RAIL) 2007 Q2 法說會逐字稿

Ladies and gentlemen, good morning. Welcome to the Freight Car America, Incorporated second quarter 2007 earnings conference call. At this time, all participant lines are in a listen-only mode. There will be an opportunity for your questions at the end of today's presentation. Please note this conference call is being recorded.

An audio reply of the conference call will be available beginning at 2:30 p.m. Eastern Daylight time today until 11:59 p.m. Eastern Daylight time on August 2, 2007. To access the replay please dial 800-475-6701. The replay passcode is 879934. An audio replay of the call will be available on the company's website within two days following this earnings call.

I would now like to turn the conference over to Kevin P. Bagby, Vice President of Finance and Chief Financial Officer of Freight Car America. Mr. Bagby, please go ahead.

Thank you, Val. Before we begin, we would like to remind everyone that statements made during this conference call relating to the company's expected future performance or future business prospects, events, and plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

Certain risks and uncertainties may cause forward-looking statements to differ from actual results including, among other things the cyclicality of our business; adverse economic and market conditions; fluctuating cost of raw materials; and additional risk factors described in our earnings release for the second quarter 2007 and in our annual report on Form 10-K filed with the Securities and Exchange Commission.

Forward-looking statements represent our estimates and assumptions only as of the date of this call. We expressly disclaim any duty to provide updates to our forward-looking statements whether as a result of new information, future events, or otherwise.

The discussions today may reference a non-GAAP financial measures of EBITDA. Reconciliation of our net income to the company's EBITDA is available in the supplemental disclosure included in our earnings release for the second quarter 2007. This earnings release is posted on the Company's website at www.FreightCarAmerica.com. I'd now like to turn the call over to Chris Ragot, our President and CEO.

Thank you, Kevin, and good morning. Joining Kevin and me today is Ed Whalen, our Senior Vice President of Marketing and Sales, and we would like to welcome you to Freight Car America's second quarter 2007 earnings call.

I'm going to discuss the highlights of the company's performance this second quarter, and Kevin will provide a detailed review of our financial performance.

Industry-wide, 11,595 new cars were ordered in North America in the second quarter of 2007. That's an increase of 4% from the first quarter of 2007. Rail car orders for tanks, intermodal, and steel hopper cars led second quarter activity. Tank cars orders continued to dominate the industry, totaling 4,236 units, accounting for 36% of the cars ordered. Intermodal cars accounted for 2,290 units ordered, or 20% of the total market, while steel hopper orders were 2,075 units, or 18% of the total market orders.

Industry-wide, there were deliveries of 16,143 new freight cars in the second quarter of 2007, down 6% sequentially from the first quarter of 2007. The industry backlog, therefore, decreased by 5,127 units but remain strong at 73,911 units of which 75% was a combination of covered hoppers and tank cars.

Freight Car America order activity in the second quarter was 2,262 units up from 678 units in the first quarter. Our total backlog of unfulfilled orders was 5,589 rail cars at the end of the second quarter, down from 6,006 unit as of March 31, 2007.

Coal rail car loadings year-to-date through June 30, 2007, were 1.3% below 2006 levels. While coal stockpiles are high, we expect coal production and consumption to normalize in the second half of this year.

As you know, order activity in a sector can be lumpy, and we expect this trend to continue for the near term.

Our second quarter 2007 rail car deliveries were 2,679 units, down from 4,077 deliveries in the first quarter of this year and lower than 4,711 units we shipped in the second quarter of 2006.

We have adjusted our manufacturing production rates and employee levels at all our facilities to reflect present market conditions to meet the delivery requirements of our customers.

Regarding our operating performance, total sale of revenues in the second quarter 2007 were $195.4 million compared to $365.4 million in the same period in 2006. We achieved net income the second quarter of 2007 of $11.5 million compared to $36.6 million in the same period of 2006.

Second quarter net income per share was $0.98 on a fully diluted basis compared with net income per share diluted of $2.86 in the second quarter of 2006.

In the near term we expect the market for coal cars will remain soft throughout the remainder of this year and early into 2008. On the intermediate horizon, however, the foundation for coal as a primary fuel for electricity generation remains strong. It will continue to provide roughly half of the projected base stock for total electricity generation during the foreseeable future.

Over the long term, we expect cleaner coal technology to provide the ability to supply increasingly environmentally friendly coal source electricity in the future. With that outlook, we continue to maximize our coal-car heritage as we move forward.

As we manage our way through the constraints of the current coal-car cycle and market conditions, we are continuing to position Freight Car America for long-term success as we progress on several strategic growth initiatives.

While all of our second quarter deliveries were coal cars, we are progressing with our plan to participate in the rail sector with additional car types such as intermodal, double-stack well cars in the near future.

Our current double-stack intermodal cars are performing well in service, and our new prototype articulated double-stack car is undergoing testing at the TTCI test facility in Pueblo, Colorado, and is on schedule.

We have good visibility on orders for more than 300 double-stack intermodal and hopper cars. This further indicates our commitment to prime diversification and clearly signifies we're moving forward in this manner.

In 2007, we plan on over 14% of our deliveries coming from non-coal-carrying rail cars. This compares with less than 5% for the full year in 2006. Freight Car America is absolutely committed to diversifying our product portfolio to address the market needs, and our progress in this area remains on schedule.

We have significantly increased our focus on cost-reduction activities at all levels of the organization, and our total employment levels are 22% below March 2007 levels, and 35% below 2006 levels. We continue to identify and eliminate waste in our processes, and strive for continuous cost improvement.

In addition, we continue to optimize our production mix as 100% of our second quarter deliveries came from the lower-cost facilities compared to 79% in the second quarter of 2006.

Taking full advantage of the lower-cost facilities lowers our breakeven volume, which is critical for the company to sustain profitability at this point in the market cycle.

To produce our rail cars at a most competitive cost structure, we are continuing to evaluate our manufacturing capabilities, and we are investing the required capital to introduce steel-body railcars into our low-cost facilities. This is part of our ongoing evaluation and rationalization of our manufacturing capacity and footprint.

In addition to our core organic domestic business, we are continuing to evaluate additional opportunities to enhance the value of Freight Car America for our shareholders. We are exploring several international acquisitions and investments and will be prepared to make announcements regarding these opportunities later in the fiscal year.

Overall, our strong balance sheet provides us with the ability to fund strategic initiatives from internally generated cash flows. As of June 30, 2007, the company purchased 29.6 million of common stock as part of our previously announced share repurchase plan. The share repurchase program is consistent with our commitment to enhancing the value of the company for our shareholders, and we will continue to explore other shareholder enhancements in the future.

To achieve our strategic growth initiatives, the company has assembled and aligned a focused management team to deliver its objectives. Several organizational announcements and personnel additions were made during the quarter to strengthen our team.

We promoted Ken Bridges to the position of Senior Vice President of Operations, overseeing all manufacturing operations; Charles Magolske has been promoted to the newly created position of Vice President of Business Development and Strategy; in addition, Tom McCarthy has joined Freight Car America's newly established position of Vice President of Human Resources; and Larry Trusdell has been appointed to General Counsel of the company. We expect to realize substantial cost savings from hiring an in-house counsel.

We also have realigned our customer service department and have added several additional field engineers to monitor and evaluate our products and service to speed the development of design improvements, to bring advancements into production more rapidly for the benefits of our customers.

These changes, in addition to others not named, have recently been made to better align our management team to service the needs of our customers, collectively reduce our cost structure, and to prepare the company for long-term success.

In summary, we continue to drive toward successful implementation of our strategic initiatives, focusing on product diversification and rationalization, customer satisfaction, stringent cost control, and capitalizing on the potential international strategic growth opportunities in an effort to ensure the long-term success of the company for our shareholders.

Now I would like to return the call to Kevin to address our second quarter financial results in more detail.

Thank you, Chris. As indicated earlier, our sales revenue for the second quarter of 2007 was $195.4 million, and that compares with $365.4 million for the same period in 2006. The decrease is attributed primarily to lower industry volume as well as lower demand for coal cars.

Rail car deliveries totaled 2,679 units in the quarter, and that compares to 4,711 units in the similar period in 2006, a decline of 43%.

Our gross margin for the quarter was $24.7 million, and that compares to $65.6 million for the second quarter of 2006, a decrease of $40.9 million. The corresponding margin rate was 12.6% compared with 18% generated in the second quarter of 2006. The change in the margin rate was driven primarily by lower volume and related leverage and a more aggressive pricing environment.

We continue to leverage our low-cost facilities, shipping 100% of our production from these facilities during the quarter. This compares to 79% in the second quarter of 2006, which is significant, as our conversion cost is much better at these facilities, and it lowers our breakeven volume point.

As production levels have declined, we have adjusted our production rates and employment levels. As Chris indicated, our employment level is 35% below the second quarter of 2006.

We had challenged our entire management team to aggressively pursue cost reduction opportunities across the company. Also, we are reviewing our manufacturing capabilities with a focus on lowering our breakeven point and, in addition, we are pursuing the process engineering improvements and product design changes to further enhance these efforts.

Selling, general, and administrative expenses for the second quarter of 2007 were $8.7 million compared to $8.2 million for the same period in 2006. The increase in SG&A cost for the second quarter reflects increased investment in product development programs to support our product diversification and continuous improvement initiatives. We will continue to invest in new product development throughout 2007.

Net interest income for the quarter was $2.2 million. The income tax provision for the second quarter was $6.6 million with the effective tax rate of 36.7%. This compares with an effective tax rate of 37.4% in the second quarter of 2006.

The change in the effective tax rate is attributed primarily to an increase in the domestic manufacturing deduction.

Net income was $11.5 million for the quarter, down $25.1 million from net income of $36.6 million in the second quarter of 2006. Net income was unfavorably impacted by the same factors addressed earlier.

Our diluted income per share was $0.93 for the quarter compared to net income of $2.86 per diluted share for the same period in 2006.

Earnings before interest, taxes, depreciation, and amortization, or EBITDA, was $17 million for the quarter.

With respect to cash flows, we generated net cash flow from operations of $3.4 million for the second quarter of 2007 compared to cash generated from operations of $59.7 million in the same period 2006. The decrease in net cash provided by operating activities was primarily attributed to the decrease of $25.8 million in net income adjusted for noncash items; a decrease of $18.3 million attributed to changes in primary working capital accounts of accounts receivable and inventory net of accounts payable and due to reductions in income tax payable in other accrued liabilities.

Net cash flow used in investing activities was $1.6 million. Net cash flow used in financing activities was $4 million related primarily to the stock repurchase program.

We have demonstrated a track record of enhancing shareholder value with our investments in manufacturing facilities and our stock repurchase program. Year-to-date through July 25th we have repurchased $34.5 million of stock as we move towards our goal of $50 million in share repurchases. We plan to complete this program by the fourth quarter of this year.

We continue to evaluate other strategic initiatives and opportunities as we maintain our focus on maximizing returns for our shareholders.

Weighted average total number of basic shares outstanding in the second quarter was $12,227,256, while the weight number average total shares diluted outstanding was $12,307,011.

In summary, the management team continues to focus on cost control, execution of our diversification initiatives, and pursuing other opportunities that will further enhance shareholder value. In addition, we have a disciplined approach to working and capital investments.

With that, I'd like to turn the call back over to Chris.

Thank you, Kevin. As noted before, we are pleased to report on our performance and the initiatives we are pursuing to ensure a healthy stream of earnings into the future.

In closing, I would like to thank you for your interest in our company and participating in this call, and we look forward to updating you again during our next conference phone call. And we are now ready for questions, Val.

Thank you. (Operator Instructions) Michael Gallo, C.L. King.

I was wondering if you can give us any more color on what types of acquisitions or areas where you think you might be looking to make acquisitions in terms of diversifying the international revenue base, and then I was wondering if, at this point, any decision has been made with regards to the Johnstown plant? Thank you.

As far as the future strategic growth initiatives right now, we have a good team of people within our organization that work with outside consultants, both in a banking sense and also with private consultants who are just giving us some data and some information analysis on various targets that we're looking at.

I would say, on a broad spectrum, we're looking at after-market capabilities, we're looking at the issues regarding manufacturing diversification, and so forth and so on. I would tell you that the spectrum that we have in front of us right now is very wide, and looking at in internationally, we're focusing right now primarily our attention on India, but I would also say to you that we have other initiatives that we're pursuing on an international basis, but the primary focus right now internationally would be India, and we feel very positive about the opportunities that might come our way, and I think there will be some announcements on India and further international talk before the year is over.

Brannon Cook, JP Morgan.

I guess if you look across the industry-wide coal orders in the second quarter, things picked up a little bit versus where things were in the first quarter. Could you talk a little bit about what you're hearing from your customers and your outlook from this perspective? Obviously, things can be a bit lumpy with the orders, but do you think the first quarter maybe marked a bit of a bottom, and things get better from here? Or should we think about things continuing to be a bit lumpy?

I'm going to let Ed Whalen talk a little bit about the marketplace. Ed, would you comment on that, please?

I would say that the long-term opportunities for coal cars where people are expanding their fleets, adding capacity, and so forth, are still in place, and we expect those to move forward. But in the interim, here, I still think we're going to see some fairly lumpy conditions for the balance of '07 and into early '08.

Okay, and then a question on your product diversification. You know, it sounds like you're continuing to work on the intermodal product. Should we look for any meaningful revenue contribution from that this year, or is that a bit longer-term?

The intermodal really we're looking for revenue in a fairly significant way to '08 and '09 and beyond.

Okay, so we shouldn't look for any sales for that in the back part of the year?

You'll see some sales of that, mostly on an international basis.

Brannon Cook. Okay, okay. And then on the acquisition front, are you guys pursuing a strategy where you might consider a number of smaller transactions, or are you thinking more -- one or two larger moves?

Right now, we're looking across the spectrum, and I'm not really giving any guidance on that particular issue other than saying that we have a lot of initiatives going on right now, and there's a lot of dialog with several sources in different organizations.

Okay, and then -- so in terms of cash use through the balance of the year, should we just think about additional share buybacks and acquisitions?

Yes, that's a fair statement.

Jason Feldman, UBS.

If I heard you right, did you say that 100% of the production in the quarter was from low-cost facilities?

That is correct.

Okay, the last that I read from the local paper in Johnstown, you've still got about 180 people or so at Johnstown. What are they doing? Is that just because of contractual obligations or is there no one there or they just didn't deliver anything in the quarter, working on stuff for delivery later?

Basically, they were working on products to deliver in Q3.

Okay.

We also want to mention, Jason, that we continue to address our workforce on an ongoing basis. So I'm not sure what date you read that paper or anything like that -- we are continuing to adjust the workforce to our current demand.

Okay, because what it sounded like is by next month there will be only a handful of people, a couple of dozen, maybe, left. Is that accurate or is that just what's coming out in the media?

We're adjusting our workforce.

Okay. You also, I think, said something about visibility to 300 orders for intermodal and hopper cars. Given what you just said in response to the last question about international opportunities, should I assume that those are export, or could I assume that?

You could assume most of that is export.

Okay, and then last question is -- National Steel Car obviously had an announcement recently building a new plant in Alabama. A couple of the other railcar manufacturers are expanding capacity, but it seems like orders for a lot of car types are weak. How do you view the industry capacity situation as it relates to your position in the industry and what's going on with your manufacturing?

I can't speak on behalf of the strategic objectives of other companies that we compete with. From our point of view right now the market is soft, and we are reacting to it in what I consider a prudent fashion. We are rationalizing our product lines, and we're rationalizing our manufacturing footprint, so am I looking to expand my capacity assigned? The answer is absolutely not. Am I looking to rationalize our product line and our manufacturing footprint in order to coincide with what's going on in the marketplace itself, the answer is yes. And what my competition is doing and how they're focusing their resource strategically, I would say I would defer that to them.

Steve Barger, KeyBanc Capital Markets.

I want to go back on the acquisition question for just a second. You said there's a wide spectrum of opportunity in front of you. Is that a wide spectrum filled with attractive opportunities, or are you really having to sift through to find the good stuff, because there's a lot of deals that don't really fit with you?

Well, I'm not going to enter and engage myself in opportunities that don't add accretive value to our shareholders. So when we are looking at our targets, and we're looking to diversify our portfolio of products and services, certainly, we have internal benchmarks of what the returns ought to be, and that's what we're focusing our attention on. So we're not going to waste a whole lot of time getting involved with things that don't really add accretive value.

No, I understand that. I was just trying to get a sense for the environment. Are there a lot of good deals out there that you have to choose from?

I wouldn't say there was a lot, but there are some. At the same time, I would say that we're trying to flesh through that right now, and a lot of it requires having dialog with a variety of different customers -- I mean, excuse me, different companies.

Okay, and one international question, and I'm newer to the space, but we know that domestic coal mining is down because of stockpiling, and that's hurting orders. But internationally I would think that coal demand is going to remain strong for years and years.

So when you think about international, is it primarily in coal cars? Are you looking more intermodal, or is it parts and service? What opportunities are out there that are most attractive?

I think initially it's coal cars and mechanically fastened cars, initially. But I do think there's other initiatives related to other parts of our business, and future opportunities that we can apply on an international basis.

Paul Bodner, Longbow Research.

A question for the back half of the year here in terms of the backlog. Now, 1,900 of those railcars, the order you received there was for delivery in first quarter of next year, right, starting?

Yes.

And so, moving forward, basically, that says that in the back half of the year here, you're back -- I mean -- are there anymore ties to deliveries for early next year in that backlog? If you see what I'm saying there, I mean, because I've got, like, basically, 3,700 cars you could deliver in the back half of this year. I mean, are any of those for delivery, also contractually next year?

Our backlog will reflect order activity that could materialize this year as well as orders for 2008.

Okay, so you're not really staying outside of that -- what percentage may also be contracted for next year?

At this point, no.

Okay, and also in terms of just kind of the average price of the car, I mean, it kind of came down this quarter, it looks like to around 73,000 from last quarter, which was a bit higher than usual. Moving forward, any kind of expectation who should have -- in terms of your average car price?

I think that's reasonable to go forward with that number. The car price really is affected by the cars we're shipping; whether they're AutoFloods or BethGons. So I think the 73 number that you're using is a pretty fair number for the rest of the year.

Okay, for the mix, it should hold true. Any kind of impact on margins that's going to have the rest of the year, or is it kind of hold around. Obviously, a little later, volume should probably result in maybe a little lightening in the margins but any kind of guidance as far as that goes?

I think we're comfortable where we're at, where we'll finish the second quarter at.

Ryan Randall, Randall Capital.

I want to ask you guys a little bit on the demand equation. If you look back at how your deliveries occurred in 2006, 50% were financial institutions, 10% were railroads, and 40% were shippers. How is that look, in broad strokes, kind of at the end of the second quarter, is that shifting at all?

This is Ed Whalen. I would say that just because of the nature of the orders that we received in the first half of the year, it shifted more towards the railroads, but I wouldn't view that as a long-term trend.

Yes, and historically financial institutions tend to be a little more tactical. Do you have a sense that that could continue to be the case, or that will just continue to be financial institutions?

I think, long term, the mix will continue to progress as we outlined in the 10-K basically -- the share between financial institutions, railroads, and shippers.

Adam Comora, EnTrust Capital.

Getting back to the backlog, when you -- can you just give us a sense for how much of it you're expecting to deliver this year?

Well, typically, we don't give guidance like that, Adam. So I would be reluctant to provide that kind of information now. There's competitive reasons for that. Your competitors can figure out what your production rates are, and therefore translate it into price. So we're kind of reluctant to provide that information.

Okay, but we know, for certain, that 1,900 of the cars are going to be for 2008?

That's correct.

Any updates with what -- any market commentary you could give us? How the order activity looks, so far, in the third quarter?

Not beyond what we've already commented.

Michael Ware, Citigroup.

When you look at the strategic alternatives that you guys have at our disposal, you've talked about, obviously, acquisitions today being one means -- or one option at your disposal to diversify the business. Is it also fair to say that there are other players in the business that are interested in potentially being consolidators and potentially looking to increase their presence in the coal car market? Thanks.

Well, again, I can't comment on behalf of the other organizations. I would say that every company out there should be looking to strategically -- to increase their bandwidth, or their product portfolio. But, at the same time, I think there's probably a healthy amount of talk going on regarding some consolidation. I'm not sure which industry or which products or which services but, in general, we have a clear focus on where we want to move forward. We need to expand our bandwidth, our diversification of our product line, and we're moving aggressively forward in that area.

Okay, but acquisitions -- you guys making acquisitions is not the only avenue that you're potentially pursuing here in terms of creating shareholder value, is that a fair comment?

Absolutely not. There are other initiatives going on within our organization as we speak.

Okay, thank you, and there are no further questions at this time. Please continue.

I just want to thank everybody for joining the call. We'll update on the next conference call in October.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.