FreightCar America Inc (RAIL) 2009 Q4 法說會逐字稿

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President of Marketing and Sales. We would like to welcome you to FreightCar America's fourth-quarter 2009 earnings call. I am going to discuss the highlights of the Company's performance in the fourth quarter and full year. Then Chris will provide a detailed review of our financial performance.

This is my first earnings call since rejoining the Company and I am glad to be back. While the industry is at or near the bottom of a deep trough, we faced similar circumstances before and know what we need to do to manage through these conditions while positioning the Company for the eventual upturn.

Looking back to the fourth quarter, our financial results clearly reflect the weak environment for railcar demand. Total sales revenues in the fourth quarter of 2009 were $49.4 million with a net loss of $5.5 million or $0.47 per diluted share.

However, despite the disappointing results to finish the year, we are pleased that we were able to remain profitable for the full year during this difficult period in the industry cycle.

For the full year, sales revenues were $248.5 million while net income was $4.9 million or $0.42 per diluted share. Just as importantly, we were able to deliver on our commitments to be cash flow neutral for the year ending the year with cash and investments of $129 million.

Chris will speak in greater detail to our cash position.

Regarding the railroad market, for the fourth quarter, overall commodity loadings for North American rails continued to be very soft, declining 7.5% compared to the fourth quarter of 2008. Coal loading has declined even further, falling 13.8% compared to the same period last year.

Coal inventories at electric utilities remained high through the end of 2009, although the severity of the winter across much of the US in combination with firming natural gas prices, relative to third-quarter levels, will likely have put downward pressure on these inventories. The number of coal cars in storage also remains high, but less so than some other car types. We are beginning to see indications of improvement in coal car utilization with cars starting to come out of storage.

Also, improving conditions in the global metallurgical coal markets are expected to raise the outlook for coal export activity in 2010. Additionally we estimate that upwards of 60,000 railcars were scrapped in 2009 which is about 50% higher than the historical average over the last 20 years. These factors may be the first indicators of a recovery in demand for new railcars.

We did receive additional orders for 185 cars in the fourth quarter to end the year with a backlog of 265 cars. More significantly, we are pleased to note that we have received orders for more than 3,000 new cars so far this year. These railcars will be manufactured and delivered over the course of 2010 and '11 and will provide an excellent base of business for us, allowing us to take on additional volume very efficiently.

In addition since year-end, we have received an order for more than 500 used cars from our existing inventory.

As a result of the difficult industry and macroeconomic environment we faced in 2009, the company went to great lengths to optimize performance, with a strict focus on cost management through the course of an increasingly difficult year. We carefully managed our manufacturing capacity during the year to reduce costs. We have and will continue to align our cost structure with business activity by looking for opportunities to further reduce SG&A.

Despite political uncertainties, we believe that coal will continue to be a critical element of our national energy supply for the foreseeable future. There are currently 37 coal-fired power plant projects either under construction, near construction or permanent.

Given coal's prominent role than likely continued significant contributions to low-cost electricity generation, we believe that our customers will continue to seek to replace aging steel-bodied cars with new aluminum, hybrid aluminum and stainless steel- , and stainless steel-bodied coal cars.

Our initiatives to increase other revenue sources were successful in 2009. While still less than 10% of overall sales, revenue from aftermarket part sales were up 17.6% in 2009, and refurbishment revenues nearly doubled. We have made some incremental investments to help us further grow our parts business as well.

Internationally we remain focused on opportunities to leverage our coal car expertise and to capitalize on improving global economic conditions. India is an example of such market potential and we continue to work with our joint venture partner toward the approval of our railcar design and hope to have a prototype car in the market there later this year.

Strategically, we continue to prudently evaluate opportunities to acquire additional capabilities in the aftermarket parts and railcar services sectors. Over the long term, we can enhance the value proposition to our customers by offering services that address the entire lifecycle of the coal car. However, we are also committed to maintaining the strength of our balance sheet and our liquidity position.

As I've mentioned, we will continue to face a very challenging railcar market in 2010, with the expectation that the number of railcars delivered industry-wide could fall below the 2009 level. We continue to emphasize cost-containment and operational efficiency throughout the Company in order to maintain our strong balance sheet and conserve cash.

We believe these actions demonstrate our proactive approach to dealing with the current economic environment and put us in the best position to capitalize on commercial and strategic opportunities.

Now I would like to return the call to Chris Nagel to address our fourth-quarter and full-year financial results in more

Thank you, Ed. Railcar deliveries totaled 697 units in the quarter compared to 695 units delivered in the previous quarter and 3,624 total units delivered in the same period in 2008.

For 2009, railcar deliveries totaled 3,377 including deliveries of 2,297 cars sold and 1,080 cars leased. That compares to 10,276 cars delivered in 2008.

Our total backlog of unfilled orders was 265 units for the end of the year, compared with 777 units at the end of the third quarter of 2009 and 2,424 units at the end of 2008. However, as Ed noted, so far in 2010 the Company has received additional orders for more than 3,000 new cars and over 500 used cars.

Turning to our financial results, our sales revenue for the fourth quarter of 2009 was $49.4 million down 10% from sales for the third quarter of $55.1 million and down significantly from the fourth quarter 2008 sales of $271.9 million. Sales revenue for the year was $248.5 million, down 67% from 2008 sales of $746.4 million, reflecting a significant drop in new car sales.

Gross margin for the fourth quarter was $3.4 million or 6.8% of revenue compared to $6.95 million or 12.5% of revenue in the third quarter of this year and $27.6 million or 10.1% of revenue in the fourth quarter of 2008. For the full year, we successfully managed gross margins despite the significant decline in volume year over year. The gross margin rate increased to 14.7% in 2009, compared to 8.9% in 2008, driven by favorable car mix and the contract cancellation payment of $3.9 million that we received in the first quarter of 2009.

Selling, general and administrative expenses for 2009 were $31.3 million, compared to $31.7 million in 2008. The Company took significant actions in 2009 to reduce SG&A costs. However, we incurred a number of nonrecurring costs this year. Included in SG&A in 2009 were severance costs of $3.1 million, costs associated with the restatement of the Company's financial statements of $1 million, costs associated with the suspension of the Company's salaried pension plan of $800,000 and costs associated with the implementation of the Company's ERP system of $400,000.

We incurred a net loss of $5.5 million or $.47 per diluted share for the fourth quarter of 2009, compared to net income of $12 million or $1.01 per diluted share in the fourth quarter of 2008. For the full year, net income was $4.9 million or $0.42 per diluted share, down from 2008 earnings of $11.4 million or $0.97 per diluted share.

Despite the challenging environment in 2009, particularly as we closed the year, we were able to meet our goal of being cash flow neutral, ending the year with $129 million in cash and in investments, despite investing in additional leased cars and making a large pension contribution this year.

As a result we enter 2010 with a very strong balance sheet and excellent liquidity. Both of our credit facilities remain undrawn.

We are committed to minimizing the use of cash in 2010. If railcar volumes decline from 2009 levels, it will be challenging to remain cash flow neutral. But we're fully committed to maintaining the strength of our balance sheet. And with that we are ready to address your questions. Operator?

(Operator Instructions). Michael Gallo with CL King.

Good morning. Couple of questions. First, just wanted to focus a little bit on the gross margin rate. It has obviously bounced around quite a bit and I understand you have the mix of aftermarket parts and services and you have a very low base of revenue.

But as we look to 2010, obviously, you booked a significant order, or a couple orders there. What should we expect for the gross margin rate for the full year? And how much of the two orders that were booked would you expect to ship in 2010?

Like I did, there -- it's very challenging in this environment to predict gross margin. And I can't be in a position to try to give you any guidance for 2010 on the activity. It's pretty early in the year and as you have seen over the course of 2009 we saw quite a bit of variability in that.

I think all we can say is what we've continued to say is that in a period of weak demand, clearly, there's going to be downward pressure on margins, but we did a good job in 2009 in that same environment and we are optimistic about 2010 in terms of what we will be able to do, but I can't really give you any further guidance on that.

With respect to the volume that is going to ship in 2010 of the orders, we are continuing to work through that. We recently received those orders and are working through our manufacturing plan right now. So you'll have to stay tuned a little bit on how that is going to break down between 2010 and 2011.

Great. Second question I have is just on the order front. Obviously you've gone through a couple of quarters here where there's been or a few quarters where there's been next to no order activity. Obviously you've won a couple of orders here early in the year.

I was wondering if there's any areas where you are starting to see some improvement? I think Ed noted in his prepared remarks that you are starting to see cars taken out of storage on the coal side. I was also wondering whether intermodal might be an area where perhaps you can start to see some improving outlook for double-stack orders.

I think my recollection was you had a prototype ready to go the last couple of years. Obviously there weren't any orders, but was wondering if you could give us some thoughts on diversifying beyond coal or what areas you think that there might be some improvement in order outlook for 2010? Thank you.

Industry forecasts for 2010 orders are down significantly from the 2009 level and forward delivery projections. Deliveries are projected to be somewhere in the mid to -- let's just call it midteens.

At this point in time, it looks to me like deliveries of both the coal and intermodal car types are going to continue to remain very weak.

Okay. That's helpful. And then, just final question. I think coming out of the third quarter, Chris, I think you talked about you thought there was an opportunity to perhaps bring the G&A base down further.

I was wondering if you could give us any update on some additional costs that you think you might be able to take out of 2007? Thank you.

Yes, we are continuing to look at that as you can imagine. And as we commented and you can see that in the fourth quarter, it bounced up for the -- a number of the costs that I sited already.

We are not in a position to cite more specific SG&A guidance and unfortunately for the year at this point, but I -- we are pretty confident that 2010 SG&A will be substantially lower than 2009. And I think we will just have to, we will try to give more specifics as we can.

I mean, we -- as you know we addressed base SG&A a couple of times over the course of the year. It's not to say that we can't continue and won't continue to look for opportunities, but you can also appreciate that at this point it's going to be difficult to find further significant reductions.

Because we have obviously -- I mean, the run rate coming out of the fourth quarter was (multiple speakers).

Yes, you can't, you can't even -- yes, I would look more at the third quarter than the fourth (multiple speakers).

Right. The third quarter and then maybe some opportunity to reduce that even a little further than a reasonable --?

Yes, trim that a little bit but, yes, that's probably how I would look at it.

Okay. Thanks a lot.

George Pickral with Stephens.

Hello. Can you give a little bit of color on the order in terms of what type of car you will be building and whether you'll be building them in Danville or Roanoke?

All of the orders that we took since the first of the year are either coal cars or mineral cars. As Chris pointed out, we are in the process of --. These are fairly recent orders and we are in the process now of planning our production and we really haven't selected a site at this point in time, nor have we really selected production rates.

So it's a little early for that. We'll have more information for you at the end of the -- at this call and the end of the first quarter.

Okay, but so if you end up choosing Roanoke which is mothballed right now, are we going to see significant startup costs just to get the workers back up online? Or is it something that (multiple speakers) --?

No, I don't believe that that will be the case.

There usually aren't significant costs associated with coming back online. We're fortunate that it is somewhat fluid.

My second question is on the pricing of the rail cars. It's a pretty significant drop sequentially. Is that just a function of aggressive pricing in Q2 when you took those orders or is there a mix issue in there that is missing from leased cars or parts in referred business?

Are you trying to just -- when you say pricing are you just trying to take sales revenue and divide it by units delivered?

Right, so it's not complete apples to apples.

Yes. That's a really tough way to do the pricing because you get a lot of variables that screw that up. I would just say just step back -- I mean, for instance if a car is leased in one quarter and then we sell it in another quarter, you know it comes out of sales the following quarter so we don't double count.

So you can really get some strange metrics particularly at low-volume levels when you try to do that. So just stepping back I would say that -- I don't -- I think it has been a challenging environment all year on pricing. I don't think it is much different now than it was six months ago.

On new car pricing, lease pricing has probably softened over the course of the year quite a bit. So it would be softer than probably when we entered the year.

You are also seeing big differences in mix whether we saw mineral cars or coal cars and so forth. So -- particularly at these low volumes, it's -- I know it is really challenging for you. You want to try to do some of those metrics.

But it is really really hard right now at these low volumes and with those low variables that can sort of screw those -- that analysis up. So I would say just generally, pricing continues to be a challenge for new cars, but probably hasn't changed a great deal. And lease pricing certainly has softened over the course of the year.

Thank you for the time.

James Bank with Sidoti & Company.

Good morning. Just on the timing with the orders -- 3,500 orders you have. Just by listening, it sounds like maybe none of those are going to impact the first quarter and maybe not even the first six months of the year.

I would say that the existing backlog will be built in the first half of the year and then the new orders will start to impact potentially in late spring.

But we haven't really finalized that yet.

Okay so definitely the year is going to be very lopsided for the first half and back? Okay.

From a sales revenue standpoint it will be definitely backend loaded.

Any more leasing opportunities, I guess in the near term here, in regards to what you would maybe classify as a short-term lease or -- excuse me, a lease that you would anticipate selling within 12 months?

There are a few leasing opportunities. There are much fewer than there were a quarter ago. But we continue, we still believe we will have some cars in our fleet that we can 'flip' and we are actively pursuing that.

And in that backlog, how much would be for leasing?

(multiple speakers) you mean in our current backlog?

Yes.

Zero. None.

Yes. None. Okay. Now, Chris, on the SG&A, substantially lower was your language for 2010. Would you say it would be substantially lower from your previous guidance for 2009 SG&A? Or [were] we actually ended up here?

Our anticipation is that -- you know, earlier in the year we were talking about full-year SG&A for 2009 being in the $25 million to $26 million range (multiple speakers). Obviously we came in over that for some of the reasons I cited.

For 2010, we are hopeful that to be below what our original projection was for 2009, yes. I can't tell you how much, but at this point, but yes we are hoping to still be below that number.

Okay, that's fair enough. Two more questions. Norfolk Southern looks like they are not going to order any cars this year. They might end up leasing.

But ultimately they referenced $81 million in their CapEx would be geared towards refurbishment. Is that anything you guys might get?

I guess that the only thing I can say about that is that certainly business that we would -- are capable of performing and we would quote on should the opportunity present itself.

Okay, just because they are I guess a long-standing customer of you guys and in regard to the new car purchase doesn't necessarily suggest that they would certainly come for you for refurbishment? They can kind of bid that out?

They would -- they certainly will go out for bid on these projects? And we will be happy to bid on them when and if they do.

Last question on Titagarh. I was wondering if we could get a bit more of an update? A couple of quarters now, where we are just still seeing more or less a loss below the line. I am just wondering when this ultimately will turn into a 2,000, 3,000 railcar market for you guys?

India, as I mentioned in my prepared comments, we are hopeful to deliver a prototype car there sometime midyear this year and put it into service for testing. I don't think that we have had some delays in this process. I don't think it is reasonable to presume that we will have any accretive earnings from India in 2010.

How long does that process generally take or is -- I guess this is sort of a first for you.

I don't think there is a generally on this.

You know I guess I can't -- we don't have a very good answer for that. It takes time and it depends on how the car performs and a number of other factors. It is a time-consuming process.

Right. Okay. That's all I have. Thank you.

Steve Barger with KeyBanc.

Good morning. This is actually Joe Box, filling in for Steve. I just have a follow-up on the orders that you took post-quarter. Can you tell us what the backlog actually is on a dollar basis?

No, we unfortunately we don't -- for competitive reasons we don't discuss the dollar values of our backlog individually.

Also post-quarter, you had mentioned that there was about 500 used cars that were sold. Are these trade-in cars or are they leases that were not renewed?

Those cars were cars we took in trade some time ago.

So when you shipped those cars presumably that could come in the first half of 2010. Is that going to be included as a delivery?

Yes, that would be included as a delivery.

Also bigger picture question for Ed here. Excluding the typical sales calls that you are doing to try and drum up orders in this challenging environment, now where are you focusing most of your time these days?

On which particular sales calls?

No, I'm just asking generally speaking are you spending more time working on acquisitions? Are you spending more time working on your India JV? You know, what are kind of your priorities outside of just your normal sales calls?

I see. I'm sorry. I misunderstood. My two top priorities are selling railroad cars and managing costs basically. And then down the line comes India and strategic initiatives and those kind of things. But I am primarily forecasts -- focused on railcar sales and cost management right now.

Fair enough. Thanks.

Chris [Fayu] with CS Capital.

Yes, hello, this is [John Kwadit] speaking at CS Capital. The question is about inventories. I noticed that they are up about 30% and I was wondering what is in your inventories and why is it up and how is it valued?

Well they are valued at cost and or below our market or cost, depending on if we've seen a decline in market value on some of the cars. Included in that inventory can be work in process. It can be finished good cars that we haven't shipped yet. We have some cars, some aggregate cars, that we had manufactured that we are holding for sale. We have some used cars that we have taken in on trade as described.

So it can be any of those types of items.

At the end of the year we had made some cars that were going to ship here in the first quarter. So by and large the increase in inventories is simply a timing item of when we had some finished good cars on the balance sheet and those will ship here in the first quarter.

So if any of these new orders that were booked might they be delivered out of inventory?

The only new orders that will be booked out of inventory sold out of inventory are the used cars that Ed referred to that would be included in the year-end [and] inventory balance. A little bit over 500 cars will be coming out of that.

Okay, thank you.

(Operator Instructions). [Rick Wilson] with [Lakeside Financial].

Good morning. Question on leased cars. How many leased cars do you currently have right now?

Just under 1,000.

And is the strategy to continue to lease cars and compete against some of your buyers of cars or what is the strategy there?

I would say it has never been our strategy to compete against the buyers of -- our strategy always has been to try to fill our customer needs simply when the leasing partners weren't in a position to really initially write the lease.

You know, the market right now to write new leases as I said earlier, the pricing on leasing, on leased cars is extraordinarily soft right now. So there are probably limited opportunities for us to make it economically favorable to build a new car and go out and lease it at current market terms.

As Ted mentioned we will continue to look for opportunities to monetize the cars we do have in our leased inventory and are hopeful to be able to continue to generate cash this year by doing that. But I would say that the rate at which we would make cars and lease them is going to decline considerably in 2010, compared to the past couple of years.

I would agree.

So will you -- will you be able to get rid of that inventory then or will you sell that off or what do you plan --?

We are going to continue to look for opportunities. It depends on really how the market behaves and how much it burns up. So we are always looking for an opportunity to do that. We are always evaluating offers to see if it makes sense to sell some of those cars. Can't really tell you right now, ultimately, what the outcome is going to be.

When you look at 2010 compared to 2009, do you believe it is going to be a down year from '09 then?

This is Ed. Yes, I believe 2009 for the industry will be a down year or 2010 will be a down year for 2009.

So, can you estimate how many cars will be delivered this year if you had to put a ballpark number on it?

For the industry?

For FreightCar.

Visibility is very poor going forward for 2010; and it's very difficult for us to try to estimate that number. Industry forecasts are for deliveries to fall from about 21,000 cars in 2009 down to about in the 15 -- midteens range in 2010. Across (multiple speakers).

And that's for total types of cars, right?

Correct.

How many coal cars do -- does that break it up by coal cars?

A breakout like it. Open.

(multiple speakers)

Yes, there is a number of (multiple speakers).

I think they are expecting for 5000.

Here we go. Let's see -- I don't have a very good number here. I don't think. It looks like coal cars are going to -- are projected to fall about 1,000 units from the 2009 level or something like that.

How many coal cars were delivered in 2009 I guess?

2009? Let's see if I have that detail. There were about -- bear with me a minute here and I will give you a number. In the area of about 6,000 cars.

Rick Wilson About 6,000 coal cars? And FreightCar delivery about 3,377 of them?

Right.

The market share was a little bit over 50%?

Right.

Who is the other competitor that is delivering these other coal cars?

The other competitor is Trinity Industries.

Any reason why market share has dipped down to in the 50s as opposed to the 70s or 80s where it has traditionally been?

Well, remember these orders are very lumpy in size. It's been very competitive over the last couple of years. So if you go back in history and look at market share, it has moved around quite a bit over time, quarter to quarter and year to year.

And again remember, you are dealing with pretty small volumes. So because of the lumpiness that Ed cited it doesn't represent a trend or something to extrapolate permanently from it. It's just sort of a -- it works out that way quarter by quarter.

Do you think you'll be able to regain that market share then? Is that what I'm hearing or --?

Well, historically, we have had market shares in the 7080% area. I can't predict what is going to happen in the future, but certainly we still feel we are very well-positioned and our products are very high-quality, preferred products. So there's no reason why we can't regain market share.

I guess, Ed, your intent is to give a contract now or what is kind of the intent that you are going to do CEO full-time here, going [forward]? Is this a -- what is kind of the situation?

I'm a full-time employee going forward.

Great. (multiple speakers)

And when do you anticipate figuring out -- I think you may have mentioned this before, but where are you going to manufacture the cars for those new orders?

What was that? I'm sorry, I missed that question.

I said when do you think you will figure out where you will manufacture the new order cars?

We will be working on that during the first quarter of the year here.

Okay. All right. Thank you very much.

George Pickral with Stephens.

Hello, Chris. Sorry if I missed this in your prepared remarks but did you say what the severance expense was in Q4?

Yes, 3.1.

3.1. And then $800,000 of the pension expense?

That's right.

Okay. Cool. Thank you.

Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you very much for your participation and for using the AT&T Executive Teleconference. You may now disconnect.

Thank you.