FreightCar America Inc (RAIL) 2008 Q3 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the FreightCar America third quarter 2008 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 replay of the conference call will be available beginning at 1 p.m. Eastern Daylight Time today until 11:59 p.m. Eastern Daylight Time on November 6, 2008. To access the replay, please dial 800-475-6701. The replay pass code is 965694; again, that is 965694. An audio replay of the call will be available on the Company's website within two days following the earnings call.

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

Thank you, Anna.

Before we begin, I 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 costs of raw materials, including increasing surcharges, and additional risk factors described in our earnings release for the third quarter of 2008 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.

Our earnings release for the third quarter of 2008 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. Good morning. I would like to welcome you to FreightCar America's third quarter 2008 earnings call.

Before we discuss the quarter, I would like to note that this will be Kevin's last earnings call with us as CFO. On behalf of the Board and the rest of the Management Team, I would like to thank Kevin for his considerable contributions over the years and wish him luck with his future endeavors. We have initiated a search for a new CFO, and we will keep you appraised of that situation.

Now, on the business at hand I am going to discuss the highlights of the Company's performance in the third quarter. Then Kevin will provide a detailed review of our financial performance.

While the macroeconomic trends, and specifically the performance of the railcar sector have had an impact on our performance on both year-over-year and sequential comparison, we are pleased with our financial results for the third quarter. Total sales revenues in the third quarter of 2008 were $238 million, while we incurred a net income of $7.4 million, or a net income of $0.62 per diluted share.

Despite the pressure of this difficult operating environment, our strong balance sheet, combined with our continued focus on our strategic initiatives towards cost reduction and improving our manufacturing capacity have positioned us to weather the current industry cycle.

Regarding the railroad market, US and Canadian commodity rail loadings for the third quarter of 2008 were down 1.9% when compared with the third quarter 2007 levels, yet coal car loadings for the quarter were above 2007 levels by 4%. Record loadings of Powder River Basin Coal by Western Rails, as well as export-driven loadings for Eastern Rails contributed to the significant year-over-year growth for the quarter.

Seaboard movements of US coal are continuing to increase, the US coal export increasing by 13.4 million tons, or 36% year-to-date, through August 2008, over export totals for the same period of 2007. This trend in export activity is expected to continue into 2009. Increased demand is being driven by several factors, including increased industrialization and the attendant demand for coal-fired electricity generation in emerging markets, including India and China.

Coal inventories at electric power plants remain high, but have eased from their recent levels, as increased inventories for utilities in Southwestern and Mountain States have been offset by significant declines in inventory levels for utilities in the Midwest, Mid-Atlantic, and Southeastern States. In fact, the upward trend in overall inventory levels has started to reverse itself, as recently-published electric power sector inventory data indicates that both June and July 2008, ending coal inventories fell short of June and July 2007 ending coal inventory levels, respectively.

In general, while global economic headwinds are generating uncertainty in the near term, we believe that the long-term fundamentals of coal demand are strong.

In the near term, we expect the overall market for coal car deliveries to be favorable. While our order cycle remains lumpy, we expect our order activity to improve in subsequent years. On the intermediate horizon, we expect coal to remain strong as a primary fuel source for electricity generation. We expect that coal will continue to provide roughly half of the projected fuel source for total electricity generated during the foreseeable future.

There are currently 52 coal-fired plants which are either under construction, near construction, or permitted for construction. These 52 plants are expected to add approximately 27,000 megawatts of coal-fired capacity requiring up to 20,000 coal cars. Of these, 29 plants, or approximately 16,500 megawatts of capacity are under current construction.

Clearly, the long-term demand for our main products and services is healthy, and we are confident that FreightCar America remains well positioned to capitalize on this increased demand.

I would now like to spend a few minutes discussing the Company's efforts to mitigate the current economic conditions. During the past few quarters, we have worked diligently on cost-reduction initiatives to generate margin improvement. Since May 2008, we have provided variable price quotations, which provided for coverage of material price escalation as we sought to offset increases and input costs and competitive pricing in our industry. As of late, surcharges on raw materials and components have begun to decrease from recent highs. Although these surcharges are highly unpredictable and have adversely affected our profits, we are encouraged by this recent development. However, these are all factors that are largely beyond our control.

While we constantly seek to mitigate their impact wherever possible, we continue to focus on the items that are within our control, specifically our cost-control initiatives and growth strategy. Using a disciplined approach, we are committed to reducing costs throughout the organization and improving our competitive position. We continue to support and measure our recently-established cross-functional margin improvement teams, and our value engineering team, which have been charged with evaluating costs at every level of the organization. These teams remain focused on identification, elimination of waste in our processes in order to foster a continuous cost-improvement culture.

Aside from the cost-reduction savings, we are also working towards, and we also are executing on several strategic growth initiatives in order to position FreightCar America for our long-term success. We are moving forward with our plan to increase our participation in the rail sector with updated and expanded product offerings. We are developing new designs for open-top hopper product offerings with respect to rail cars for aggregate, or, and taconite service. We believe once the market begins to normalize, our updated and expanded product offerings will help us to diversify our revenue stream.

We continue to explore strategies for revenue diversification, including organic opportunities and acquisitions, both domestically and internationally. Earlier this year, we announced a joint venture with Titagarh Wagons Limited in Kolkata, India, to develop freight cars for the Indian market. FreightCar America and Titagarh initially developing prototype cars based on FreightCar America's designs, and assessing the market opportunities in India. We are pleased to announce that our initial work with Titagarh has been very positive and productive. We have selected a managing director for the joint venture company. Rail car prototypes are expected to begin shipment in the first half of 2009, and we anticipate the joint venture to be accretive to earnings by 2010.

During the quarter, we have also continued to explore rail car leasing market. In response to competitive market conditions, we are offering rail car leasing to our customers on a selective and limited basis. These transactions are being packaged and offered for sale to our Leasing Company customers. We believe our leasing activities will improve our ability to service our customers and compete effectively. Long term, we will continue to assess the impact of railcar leasing in our business model.

Regarding our effort to expand our revenue base, we have continued to explore aftermarket initiatives. One such effort we are currently making is in the refurbishment market, where we continue to explore and evaluate new opportunities in this sector. There is a strong strategic fit with our overall portfolio of products and services. Over the long term, we believe we can enhance the value proposition to our clients by offering services that address the entire lifecycle of the coal car.

While the general market conditions have adversely affected our sales volume and margin performance, this Management Team has established and adhered to its new strategic direction for the Company by executing on the following initiatives; lowering our break-even point in the face of rising material costs, and a more competitive pricing environment by utilizing flexible manufacturing techniques; increasing our geographical presence with joint venture in India and continuing to explore other international opportunities; expanding our revenue platform with the introduction of our new railcar designs; and developing an organization with the ability to execute on acquisitions and our organic growth initiatives.

In summary, we continue to successfully implement our strategic initiatives, and we focus on cost-reduction activities in the face of the current industry environment. We believe that these initiatives will help us navigate these difficult times and will ensure a long-term success of the Company for all our stakeholders.

Now, I'd like to return the call to Kevin to address our third quarter financial results in more detail.

Thank you, Chris.

I'd like to add that while it was a difficult decision for me to leave the Company, I know that FreightCar America's Management Team will continue to build value going forward for all stakeholders.

Order activities in the third quarter were 2,329 units, which represent an increase of 893 units, or 62% from the units ordered in the second quarter of 2008 of 1,436. We expect order activity to remain uneven for the remainder of the year, as we continue to be challenged by this difficult market.

Railcar deliveries totaled 3,082 units in the quarter, including deliveries of 2,712 cars sold, and 370 cars leased. That compares to 1,921 units in the same period in 2007. Correspondingly, our total backlog of unfilled orders was 4,401 units at the end of the quarter, compared with 4,917 units at the end of the second quarter of 2008, and 4,930 units at September 30, 2007.

Our sales revenue for the third quarter of 2008 was $238 million. That compares with $162.1 million for the third quarter of 2007. This increase of 47% is attributed primarily to higher demand for coal cars reflecting the macroeconomic issues addressed earlier, including shipments of export coal and increased coal car loadings on the Powder River Basin. As a result of the competition and market conditions, average selling prices declined in the third quarter of 2008 as compared with the third quarter of 2007. This reflects a shift in product mix to car types with different material costs, and more importantly, pricing pressures dictated by current market conditions.

Our gross margin for the quarter was $18.4 million. That compares to $19.4 million for the third quarter of 2007, a decline of $1 million. The corresponding margin rate was 7.7%, compared with 12% generated in the third quarter of 2007. The change in margin reflects the impact of higher input costs, specifically for aluminum and surcharges related to heavy castings. In recent weeks, input costs for aluminum, steel, and related components have fallen significantly after increasing to unprecedented levels during the second quarter. These input prices remain volatile.

In addition, the margin performance was adversely affected by the aggressive pricing environment. Favorably impacting the margin performance was the higher leverage related to volume increase, and improved labor productivity. We continue to focus on cost-reduction activities in our manufacturing locations. The reduction of capacity that occurred during 2007 has significantly improved throughput costs. Moreover, the Management Team has increased our efforts on process improvement and cost reductions across the Company. We have challenged our Management Team to focus on all elements of the cost structure. The rationalization of our manufacturing capacity, combined with the efforts of our margin improvement teams, has resulted in a more competitive cost position. Management will continue to focus on the manufacturing process, product design, and material cost reduction to enhance our cost position.

Selling, general and administrative expenses for the third quarter of 2008 were $7.2 million compared to $7.6 million for the same period of 2007. Higher investment in product development activities was offset by austerity measures introduced during the second quarter. We will continue to fund product development activities to broaden our revenue base.

In addition, in the third quarter, we launched an ERP system implementation to provide Management with additional tools for continuous cost-reduction opportunities and to enhance our competitive position.

Net interest income for the quarter was $600,000. The income tax expense for the quarter was $4.2 million, with an effective tax rate of 36.2%. This compares an effective tax rate of 35.9% in the third quarter of 2007. The increase in the effective tax rate was due to production levels in different locations.

Net income was $7.4 million for the quarter, compared to net income of $8.7 million in the third quarter of 2007. Net income was impacted by the same factors that we addressed earlier.

The diluted earnings per share was $0.62, compared to net income of $0.73 per diluted share for the same period in 2007.

The working capital balances reflect our effort to proactively manage the significant and unprecedented increases in input costs, as well as provide additional services to our customer base. At the end of the quarter, our accounts receivable balance of $68.3 million included an interest-bearing note receivable from an investment-grade customer of $54 million. This note receivable will be repaid in November.

At the end of the third quarter, our inventory balances of $114.4 million included work in process of $82.4 million and finished goods of $30.4 million. The finished goods inventory was shipped in the month of October. The work in process inventory includes forward inventory purchases of approximately $12 million that are intended to proactively manage price increases in the marketplace. Inventory levels are expected to normalize by year-end as we ship completed orders and convert our raw materials.

At the end of the third quarter, we entered into a new senior secured credit facility for $60 million to our leasing facility, JAIX Leasing Company. This facility will support our leasing initiatives in the short term.

Our cash balance of $128 million compared with available lines of credit provide us with strong liquidity during these uncertain economic environments. At this time, both the revolver and the warehouse facility are undrawn.

With respect to cash flow, we generated cash flow from operations of $15.9 million for the third quarter of 2008 compared to cash generated from operations of $21.3 million in the same period in 2007. Net cash used in investing activities was $36.6 million, reflecting the reclassification of rail cars on lease. We continue to actively market the rail cars on lease; however, due to the uncertainty of the current credit markets, we reclassified the leased assets as the timing of the disposition may be longer than we originally anticipated. Net cash used in the financing activities was $2.1 million.

In summary, we continue to focus on cost control, and to improve the strength of our balance sheet through the reduction of working capital and navigate through these uncertain economic times.

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

Thank you, Kevin. And again, I'd like to thank you for your contributions and wish you luck with your future endeavors.

As we face our challenging macroeconomic environment and intensive competition, our Management Team is focused on improving our cost structure and our competitive position, which will benefit FreightCar America going forward. In addition, our financial strength will enable us to navigate the challenging economic environment.

In closing, I would like to thank you for your interest in our Company and for participating in this call, and we look forward to updating you again during our next conference phone call.

We are now ready for questions, Anna.

(Operator Instructions).

Kevin Sterling, Stephens, Inc.

Good morning, Chris and Kevin. Let me start with your orders for the quarter. Maybe you could share a little more color on the orders. Were these primarily from Class-1 rails, utilities, etc., if you could share a little bit more color on your pretty significant growth in orders for the third quarter.

A combination, Class-1 utilities, and I'd say a smathering of the leasing companies.

Okay, was it primarily driven by the Class-1s or is it essentially broken up equal?

I would say that was a healthy portion of it, yes.

Okay. What does the order trend look like for Q4? I know you guys said it would be lumpy. Could you share a little color regarding your order trend for Q4?

This last month here has been a very interesting month for a lot of us, obviously, and it's hard to handicap the future. But I would say our quoting activity has remained in a good position here in the last 30 days, and I'm encouraged with this week. We've picked up several significant orders that we felt comfortable with, so at the end of the day, I was encouraged with some of the orders we booked this week.

Okay, thank you. What is your total annual manufacturing capacity right now with the two facilities in Roanoke and Danville?

We don't get into specifics around that, Kevin. It's adequate to say that our capacity that we have right now will meet the requirements in the marketplace for the foreseeable future.

Okay, thank you. And Chris, could you maybe share a little color about your outlook for 2009? I mean, I know you may not want to give specifics, but if you could help us how you're thinking about 2009, maybe even particularly the first half of 2009.

I can't go too far into 2009. Listen, I look at it this way; the last four to six weeks have been very difficult. People have been adjusting their thoughts about the future in many different ways, not only as companies, but as individuals. I am encouraged, though, during the last couple of weeks that the customers are coming back to us and locking in on some orders, as I said this week, and I'm encouraged that the order quoting activity seems to be fairly robust. So I think we'll know a lot more between now and year-end. So it's hard to handicap, it's hard to really take a look into 2009, but as of the last week or so, I've been encouraged.

Okay, thank you. And one last question, Chris. Will you guys consider a stock buyback at the current level?

Stock buyback is always an option, and those are the kinds of things that myself and Kevin have dialog with the Board with. So is it an option? Absolutely. Is it something we're going to execute on? I don't know at this time. It's something we'll have discussions with, especially the Board as we move forward.

Okay, can I ask one more question; do you have a time table for completing the ERP system?

The ERP system right now, I would say, will be completed some time in 2009.

Okay, Chris, thank you so much for your time. Kevin, thank you and best of luck to you, Kevin.

Thank you Kevin. Take care.

[Kim Burkhart, Burkhart Research].

Good morning. A couple of my questions were just answered, but I'm wondering if you've got an idea how the falling of scrap prices for steel is going to affect companies' decisions to scrap older cars.

Well, I can't speak on behalf of what our customers feel about that issue, but I'm encouraged that the input costs have come down significantly here in the last 60 days, and I'm not sure where that's going to trend for the future, but I would say we're encouraged that input cost is coming down, thus allowing us to be offering a price to our customers that has been lower than it was this past summer.

The scrapping of cars, it's too early to say what decision will be made around that, but that's really a question for our customers more than us.

Okay, well thanks a bunch.

Michael Gallo, C. L. King & Associates.

Good morning. My question is on the Danville facility, I believe the labor contract is up at the end of this week. I was wondering if you could give us any commentary on that.

We've been engaged with that now for the last two months, and the talks are going well. Everybody is in good spirits. The cooperation level is exactly where I thought it would be. It's high, and so I'm encouraged that everything is moving along in a very positive fashion there right now.

Okay great, that's helpful. And then second question, and I guess it comes back to your commentary on quoting activity, I was wondering what the significant recent decline in aluminum and steel prices, whether it might cause some of your customers to actually look to accelerate orders, as obviously, a lot of the surcharges would have gone down. And certainly, it seems like, what we hear out of most of the coal companies anyway, they tend to be contracted for 2010 with expectations that things are going to be up or through most of 2010, that things are going to be up from the levels that they were at in 2008.

Well, we're encouraged with the input costs coming down here, and related surcharges. It has been a major change from what it as at the peak of July of this year. So I think the net effect of that is that pricing is going to be something that our customers will be encouraged by. And so will it increase activities for 2009? We're hoping so.

Okay great, that's helpful. Thank you.

Steve Barger, KeyBanc.

Hi, good morning. This is actually Joe Radigan on the line for Steve; just a follow up to the manufacturing capacity. If you saw deliveries, if they looked like they were going to drop in the $4,000 to $5,000 range on a run rate basis, would you consider idling another plant, or what actions would you take to maintain margins?

Are you talking 4,000 or 5,000 units?

Yes.

We have been all along adjusting our manufacturing footprint and our capacity when we feel it's needed. We've been doing that ever since I've been on board. And to answer your question, if there is additional changes that need to be made regarding our footprint, our capacity, line capacity, we'll make those then.

Okay, and then can you talk about the fall, the recent fall on coal prices? Do you guys look at that as a leading indicator of coal car orders, or why wouldn't that be a leading indicator of coal car orders?

I don't focus a lot of time and attention on that, but I do keep an eye on it. I don't know, Kevin if you want to --.

I think coal car loading is a better indicator of where coal car activity is going forward, not necessarily the price of coal.

Yes, and I've been encouraged with the loadings here, obviously, this year, and they seem to continue to be strong. I think that will continue during the fourth quarter also.

Right, okay, and then the last question. In terms of CFO, your CFO search, can you talk a little bit of how far along are you, and what characteristics kind of define the candidates that you're seeking, and would you wait to make an acquisition until a new CFO is in place, or is that not going to be an issue?

Well, first of all, we're well into the process. Second thing, I don't think it's appropriate for me here on this call to talk about the characteristics, per se, although clearly, I'm looking for a candidate that has all of the requirements needed to be a CFO of a public company. Beyond that, I would say that we have the staff in place that will allow us to execute on those opportunities. If those opportunities come up in the next month or two, then we'll be able to execute on that with the folks that we have in our organization and with the members that we have on our Board.

But I will say, emphasize again, we're well into the search process right now.

Okay, very good. Thanks a lot.

(Operator instructions).

And there are no questions in queue at this time.

All right, well, Anna, I want to thank you very much. Again, I'd like to just say thank you for Kevin for all his hard work and his organization. We wish him well, and thank you again for participating in this call. We look forward to our future calls.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and you may now disconnect.