FreightCar America Inc (RAIL) 2010 Q1 法說會逐字稿

Ladies and gentlemen, good morning and welcome to FreightCar America's First Quarter 2010 Earnings Conference Call.

At this time all participants 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.

00 p.m. Eastern Daylight Time today until 11:59 p.m. Eastern Daylight Time on June 6, 2010. To access the replay, please dial 800-475-6701. The replay pass code is 155430. An audio replay of the call will be available on the Company's website within two days following this earnings call.

I'd now like to turn the conference over to Chris Nagel, Chief Financial Officer of FreightCar America. Mr. Nagel, please go ahead.

Thank you. 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 costs of raw materials, including increasing surcharges, and additional risk factors described in our earnings release for the first quarter of 2010, and in our annual report on Form 10K 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 first quarter of 2010 is posted on the Company's website at www.freightcaramerica.com.

I would now like to turn the call over to Ed Whalen, our President and CEO.

Thank you, Chris, and good morning. We would like to welcome you to FreightCar America's First Quarter 2010 Earnings Call.

I am going to discuss the highlights of the Company's performance in the first quarter, as well as what we are seeing in the marketplace. Then Chris will provide a detailed review of our financial performance.

Our financial results for the first quarter of 2010 clearly reflect the continued weak condition of the new coal car market, as well as the low level of backlog coming into the quarter. Total sales revenues in the first quarter of 2010 were $19.5 million, with a net loss of $3.3 million.

Sales in the fourth quarter of 2009 were $49.4 million, resulting in a net loss of $5.5 million. But it is important to remember that the fourth quarter of last year included $3.9 million of non-recurring severance and pension suspension costs.

Rail car deliveries dropped to 321 units this quarter compared to 697 units in the fourth quarter of 2009.

Our liquidity position continues to be a positive note with cash and marketable securities on hand at the end of the first quarter of $139 million. Chris will speak in greater detail about our cash position and the first quarter cash flows in the financial portion of our comments.

Regarding the railroad market for the first quarter, overall commodity loadings for North American rails began to show signs of improvement, with significant improvement in many categories such as grain and chemicals. However, coal loadings are improving more slowly than loadings for other commodities.

North American loadings for the quarter were down 5.6 percent as compared to the first quarter of 2009, although loadings improved by 3.7 percent sequentially from the fourth quarter of 2009 to the first quarter of 2010. In recent weeks, coal loadings have continued to improve, but year to date loadings still remain below last year.

Further, year over year comparisons for coal loadings should begin to show more significant improvement due to the large decline in loadings that occurred in the second quarter of last year. North American coal loadings in the first quarter of 2009 were 5.6 percent lower than the same period in 2008, but loadings in the second quarter of last year were 12.6 percent lower than the second quarter of 2008.

While we have seen reductions in recent months, coal inventories at electric utilities still remain high relative to historical levels with quarter end figures estimated to be roughly 20 percent above the ten percent ten year average.

The number of coal cars in storage also remains high, but we have seen improvement over the course of the quarter as coal cars are starting to return to service. We estimate that coal cars in storage are down to about 25,000, which is down from the estimated peak of approximately 50,000 in storage last year.

Improving economic conditions, increased electricity generation, and favorable trends in coal export activity, specifically metallurgical coal, should have a further positive impact in terms of returning coal cars to service.

As we previously announced, we received orders for 3,656 rail cars in the first quarter, which increased our backlog from 265 units at December 31, 2009 to 3,600 units at March 31, 2010. Approximately 2,000 of the cars in backlog will be delivered to customers this year with the balance being delivered in the first half of 2011.

While we are encouraged by the orders we have secured so far this year as well as the direction of coal car trends, we remain very cautious about the outlook for new coal cars for the rest of the year. Loadings have yet to turn positive compared to prior year, and the number of coal cars in storage is still significant.

Additionally, the lease market for coal cars is still very weak and significant lease renewals in 2010 and 2011 should keep the market soft generally making leasing an attractive shorter term alternate to the purchase of new coal cars.

As a result, we have little visibility as to when sustained demand for new coal cars will return. Long term, despite some political uncertainties, coal is expected to remain a critical element of our national energy supply for the foreseeable future.

There are currently 31 coal fired power projects either under construction, near construction, or permitted. Given coal's prominent current role and likely continued significant contribution 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.

However, given that industry conditions remain challenging, the Company continues to focus on optimizing performance and strictly controlling costs throughout the organization. I am confident we will be well positioned to capitalize on the market recovery when it occurs.

Looking to other parts of the business, our after market parts business continues to perform well. First quarter sales are below last year due to the timing of some large orders, but we are running ahead of plan and feel good about the outlook for the year.

Internationally we remain optimistic about opportunities to export our coal cars to markets outside of the US, and we believe that the market potential for coal cars in India continues to be very strong. We are continuing with our plan to have a prototype car in the market this year and are working as expeditiously as possible to gain the requisite approvals to allow us to begin manufacturing and selling coal cars in that market as soon as possible.

To further strengthen the business and capitalize on growth opportunities, we are continuing to evaluate opportunities to acquire additional capabilities in the after market parts and repair service sectors. We believe that the demand for repairs and maintenance service on coal cars will be strong in the near term, and want to be in a position to capitalize on this business. However, we greatly value the strength of our balance sheet and remain prudent in our approach to grow through acquisitions.

In summary, we will continue to face a very challenging rail car market in 2010, and expectations remain that the number of rail cars delivered industry-wide will likely fall below 2009 levels. We are cautiously optimistic about coal car trends and the early signs of a potential recovery in new car demand, but there is limited visibility to when a sustained recovery will occur.

We will continue to emphasize cost containment and operational efficiency throughout the Company in order to maintain our strong balance sheet and conserve cash. We believe our 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 first quarter financial results in more detail.

Thank you, Ed. As Ed mentioned, we delivered 321 rail cars in the first quarter of 2010, including the delivery of 105 used cars we had previously taken in on trade and 136 cars on lease. We successfully sold 60 of these leased cars before the end of the quarter. We had delivered 697 cars in the fourth quarter of 2009, and 876 cars in the first quarter of 2009.

On a positive note, our backlog has increased to 3,600 cars as of March 31, 2010, which is an encouraging increase from the backlog of 265 cars at December 31, 2009.

Turning to our financial results, our sales revenue for the first quarter of 2010 was $19.5 million compared to $49.4 million in the fourth quarter of 2009 and $39.6 million in the first quarter of 2009.

Gross margin for the first quarter was essentially break even, reflecting the very low level of manufacturing activity in the quarter despite the relatively low fixed cost burden at our manufacturing plants. Gross margin for the fourth quarter of last year was $3.4 million, or 6.8 percent, while gross margin in the first quarter of 2009 was $10.3 million, or 26 percent. Recall that gross margin in the first quarter of last year benefited from a $3.9 million contract cancellation fee.

For this year, given the anticipated low levels of manufacturing activity and the competitiveness of pricing in the current market, we expect to see downward pressure on margins until we begin to see stronger signs of a recovery in demand.

Selling, general and administrative expenses for the first quarter of 2010 were $5.7 million compared to $10.7 million in the fourth quarter of 2009, and $7.3 million in the first quarter of last year.

The reduction in SG&A reflects the actions we have taken to reduce spending, including staff reductions and the elimination of the cash incentive and compensation plan until results improve. SG&A expenses in the fourth quarter of last year included $3.9 million in non-recurring severance and pension suspension costs.

Our effective tax rate for the first quarter was 44.7 percent compared to approximately 24.8 percent in the fourth quarter of 2009 and 25.2 percent in the first quarter of 2009.

As you know, we are able to deduct the amortization of good will for tax purposes, but we do amortize this good will for book purposes. This creates a permanent favorable tax item, which serves to reduce our effective tax rate in periods of profitability and increase our tax rate in periods of loss. The after tax loss for the first quarter has been recorded as a deferred tax asset on our balance sheet since we anticipate sufficient future profitability to realize the benefit of the NOL carry forward.

We incurred a net loss in the first quarter of $3.3 million or $0.28 per diluted share compared to a net loss of $5.5 million or $0.47 per diluted share in the fourth quarter of 2009, and net income of $2.4 million or $0.20 per diluted share in the first quarter of 2009.

Our liquidity position remained strong at the end of the quarter with cash and marketable securities on hand of $139 million as of March 31, 2010 compared to $129 million at December 31st, 2009.

During the quarter, we did receive $28.4 million in payments from customers in advance of starting production on their car orders, which helped to offset the operating loss and the cash impact of an increase in working capital in the quarter.

The value of total rail cars under lease was $65.9 million as of March 31st, 2010 compared to $61 million at December 31st, 2009. The increase in the amount of cars under lease was due to the lease of 76 cars during the quarter that were previously held in used car inventory at December 31st, 2009. In the current leasing environment, we continue to believe that our investment in leased cars will not significantly change over the course of the year.

Overall, despite a tough market and a tough quarter, we are pleased with our ability to control costs and maintain the strength of our balance sheet. And with that we're ready to address your questions.

Thank you. (Operator Instructions). And the first question will come from the line of George Pickral with Stephens.

Good morning, guys.

Good morning.

Good morning.

Maybe this question is for you, Chris. The gross margin negative I think for the first time in at least ten years, I know you said it was because of low manufacturing levels, but can you point to anything specifically in the quarter that caused it to be negative?

There was nothing. There is nothing in particular that caused it to be negative. I mean we obviously had an extraordinarily light level of manufacturing activity in the quarter and so, you know, I don't know if - I don't know what quarter over the past ten years would have matched that in terms of that low level.

We do believe that we had a relatively low level of fixed costs in our plants, but at some point when you're not manufacturing much, it's tough to generate much margin on that low level of activity.

Okay. So - and just to be clear, when you say you expect pressure on - or you expect declining margins to continue, I'm assuming you mean or hope you mean year over year and not sequentially?

I don't think -

But I guess that depends?

- I said declining margins. I think I just said that we expect to see downward pressure on margins and nothing more specific than that so I'm not trying to predict whether margins sequentially where they're going to go from this quarter, George.

I'm just saying that this is - we all know the environment we're operating in and so pricing is very competitive and volumes are low. So we're going to - it's going to be a challenging environment until we see a recovery.

Okay, fair enough. Sticking with this though you said 2,000 cars this year, 1,500 by the first half of 2011. Ed, I think you said that.

Will there be any sort of ramp up phase where that's going to be more back end loaded towards the - well, towards the back half of 2010? Or should we kind of think about it as a constant approximately 700 cars per quarter run rate?

I think we mentioned previously that production this year will be back end loaded in the back two quarters of this year.

Okay. Well, on top of that, what's your total manufacturing capacity as it stands now?

Well, the - our peak capacity over the past several years has been about 18,000 units.

Right, but based on the number of employees you have working today not furloughed, what - do you have an idea of what your --

Well, you have to remember that when we're in this type of a condition, we lay off our hourly employees. And so as we build volume back again, we will rehire those people.

Okay. So when we think about these volumes coming back in the back half of the year, you are going to need to hire these people back?

That's correct.

So that kind of leads into my next question. When we think about SG&A, that needs to start going back up in the back half of the year to account for these people coming back?

No, I wouldn't say that's the case. I mean SG&A -

That wouldn't be in SG&A.

- is really unrelated to volume.

George, they won't show up in SG&A. They would show up in manufacturing costs and margin. So you won't see SG&A go up as a result of that.

Okay. Last question then I'll turn it over. You talked about India being an opportunity. Any outlook into China?

They're a net importer of coal now that should continue. I just didn't know if they were infrastructure or government issues that keep you out of there or is that a significant opportunity?

I think certainly there is a lot of rail and coal activity in China. In the near term, we have elected not to become active in China at this point.

Okay, great. Thanks for the time guys.

Okay.

Thank you. And the next question comes from the line of Joe Box with Keybanc Capital Markets.

Hi, good morning, Ed. Good morning, Chris.

Good morning.

I apologize. I actually missed the first part of the call. Can you repeat what your expected delivery cadence would be for the backlog - if you went through that?

Well, we basically said that we expect -

Something like 2,000 cars, right?

- about 2,000 cars will be delivered this year and about 1,000 cars will be delivered in the first half of next year.

And just to clarify, that does include the cars that you delivered in 1Q? That does not just take into account the backlog, right?

Correct.

Yes, that's true.

Okay. Excluding the used and leased cars that were delivered this quarter, it looks like you shipped about 80 new rail cars in the quarter.

Correct.

Can you talk about the pricing on these cars relative to the used cars that were sold, relative to the leased cars and then maybe just us a sense where that shakes out relative to the 3,600 cars in backlog?

Yes, I can - I mean we're not going to be able to comment on individual order margin, Joe. There's not much comparison to be made between new car pricing and sales versus used cars necessarily. And unfortunately we can't comment on anything specific in the backlog.

So all I can do is go back to the comments that were just made previously with George is that it's a tough environment. When you have this few orders out there in the marketplace, you're seeing the behavior you would expect.

It's going to be - it's extremely competitive on the pricing. That, coupled with low levels in manufacturing, we expect to see a lot of downward pressure on margin rates until volumes pick up. Unfortunately we can't really speak more specifically to individual orders.

That's fair. Can you just talk about order inquiry levels? I mean obviously we're starting to see a pick up inquiry levels for some of the other rail car types. Have you noticed a pick up as well in conversations or inquiries from customers on the coal side?

I think that what we're seeing are inquiries for specific applications for cars for either replacement or for new plant facilities. But I wouldn't say that there's been a great change from what we've seen over recent months in that area. There's certainly a lot more talking going on, but I wouldn't characterize that there has been an overall pick up in inquiry levels for coal cars.

Okay. Thanks for the call there.

Can you just talk about your strategy to manage working capital for this multi-year order that have in your backlog? I'm just curious if you've already converted the advance payment into inventory.

And if you could also just talk about, you know, how you're going about maybe locking in your pricing on the steel side and how working capital should play out.

I'll take -

I guess the partial answer to that is that, no, we have not entirely converted the deposit into inventory yet as you can see from the balance sheet. And we intend to fully protect ourselves with respect to material cost changes on the order.

Okay. How about after the quarter? I mean I can see what it looks like as of the end of the quarter.

Well, that comment applies to the entire order.

All right. Last question then I'll turn it over. You had mentioned potentially going out and looking at some of the opportunities on the after market parts and service side. Can you just talk about what you're seeing out there?

Are there actually any decent sized opportunities? Or would it be maybe more of a roll up type strategy like, you know, some of your competitors have done in the past?

That segment of the business is fairly fragmented and there aren't any individual very large flares so I think it's going to be more of the latter.

Okay. Thanks for your time, guys.

Thank you.

Thank you.

Thank you. (Operator Instructions). And we'll move to the line of Michael Gallo with CL King

Hi, good morning.

Good morning.

A couple questions. Just, you know, we've hit on the coal car types. I just wanted to talk about - I know if we go back a couple years ago there was a new inter-modal design that FreightCar had come out with.

I was wondering whether you're pursuing non-coal orders as well in areas where things might be picking up more rapidly and whether you think you have designs in some of those other markets where you might be able to pick up some incremental cars? Thank you.

Yes, we continue to pursue orders in all of our traditional marketplaces, which include inter-modal and aggregate and ore and so forth. So that's a continuing process.

Do you expect on the other types that as we go through the year that you would - that we'll see pick ups in just overall order rates? Or do you think it's going to continue to be a very choppy kind of order here, order there, but nothing in aggregate?

We're again seeing similar activity levels as I described in the coal car area. But as yet, I don't see any really great ramp up in the inquiry activity in those areas.

Okay, great. Final question. Is there a sense as we look at cars in storage, really in all types have come down significantly in the last six to nine months, any feel for what kind of a normal level of car in storage would be?

And at what point would we expect to see more robust activity on that front? Is it, you know, based on the current pace, is that something that's three to six months out if cars in storage continue to come down at the same rate? Or any color you can give further on that would be helpful. Thank you.

Well, total cars and storage have come down from a peak of about half a million to just under 400,000 at this point in time, which is encouraging. However, that's still about 25 percent of the fleet that's idle, which is a fairly significant number yet. Certainly you won't get to the point where every car in storage is in service, but that number has to come down significantly before I think we see a generation of growth in car orders and backlog.

I guess just anecdotally one of your competitors had indicated that they thought that those numbers were overstated and certainly some of the larger railroads have suggested that their cars in storage have come down much more than that. So I was wondering just your own view on - I mean are those - is that data you think reflective or do you think it's lagging or, you know, just your own view on that? Thank you.

Well, the data is reported weekly, so I don't think it's lagging very much. I mean we have to rely on the published data and I guess that's all I can say about that.

Okay. There's just actually one other final question. Obviously you're talking about the getting the prototypes ready for the - in the Indian market. Any feel for how big you think that market potentially could be for you in terms of units shipped once it's fully up and operational, assuming that the prototypes are accepted?

It's pretty difficult to tell right now because there are mix of car types used over there. But it is a fairly significant marketplace.

When do you expect to have those prototypes delivered?

We expect that the first prototype will be delivered by the end of this year.

Okay. Thanks a lot.

You're welcome.

And we'll move to the line of James Bank with Sidoti & Co.

Hi, good morning.

Good morning.

Good morning.

I was just trying to get a hold on the number of orders additional that you booked in the quarter versus the 3,500 you had already announced on the fourth quarter call. Was it 260?

Yes, what did we say? 3,656 for the number of orders in the quarter?

Right.

But then net - the CSX order on the refurbished cars in addition to the 105 of those cars you'd already shipped? I'm just trying to get a sense of the brand new cars that you've booked in the quarter that you hadn't pre-announced.

Well, the -

I think it's 3,080, right? No, I mean that we announced at the end - by the end of the last year?

Right. At the end of last year, you announced 3,000 for CSX and then 500 refurbished, -

(Inaudible).

Isn't it?

And if I've done this right it looks like you booked -

(Inaudible).

- an incremental 260?

Well, about the time of - we announced the CSX order, we had also secured the other orders that are included in that 3,656 - at about the same time. So the - we just simply highlighted the CSX order at the year end call.

Right.

But the 3,656, the orders that we got this quarter, we had to have secured it at about the same time at the year end call.

Okay. So I'm just - I'm sorry, Chris. I'm still very confused. Aside from the 500 furbished cars you already announced and the 3,000 cars you announced on CSX, what else new did you get in this quarter?

The difference. The difference. But I'm just telling you -

Okay.

- that we got the difference this quarter between that - adding up that hundred and whatever cars, 120 cars.

Okay, so it's 156. Okay.

And we had secured those at about the same time as the CSX order.

Okay. Okay. And the tax benefit, I'm sorry, I'm sorely confused on that. I mean it's a pretty big benefit of $2.6 million.

I guess so could you elaborate on that a little bit further because it looks like it didn't cost you anything in the quarter. I really looks like you got a pretty big benefit but from your comments you're suggesting that it was going to be a cost because you guys moved to the loss.

No, okay. No, it's - it can be a little big confusing. So you're right. There was no cost in terms of income tax charged this quarter. Because of the loss, we were able to book an income tax benefit. All that benefit runs through as a benefit to the P&L and goes on the balance sheet as a deferred tax asset in terms of an NOL carry forward.

Now - and then I explained in the comments - in the descriptive comments - that the rate is high because we have a - we take our normal statutory rate of call it about 35 percent, and then we adjust it for this - some other things, but the biggest item is the permanent favorable difference on amortization of good will.

Okay.

So if you were making money - if we had made $10 million in the quarter and we'd get to apply that statutory rate of 35 percent, then we apply it as a favorable adjustment and would reduce the rate from 35 percent to something lower than 35 percent.

But in a period of loss, you'd take that statutory rate and then you get to add on this additional tax benefit because it's in a period of loss. So you're starting with a tax benefit, and then you're adding a greater tax benefit to it. So it's additive to the rate, so that's why our rate is up over 40 percent in the quarter.

Okay, got it. Thank you. Now if I could on the gross margin, with the leasing opportunities very far and few in between, I guess is it safe to assume if you're delivering roughly 300 cars in a quarter that's sort of the break even market given today's pricing?

Well, you know, I guess if you had the same mix of leasing used cars and new cars, we articulated the mix between them. We did - we leased 130 some odd cars and we did turn around and sell 60 of those. So I can't say for sure that 321 cars if the break even on this, James, but you can see that with that mix this is what we got.

Okay, fair enough. And the - or excuse me the CSX order, is that something you'll be building out of the Danville plant?

We are - we're not going to comment on production locations.

Okay. And lastly, CapEx through the year, Chris. I can't even remember if you had given previous guidance on that.

We had not given guidance on it, but it's going to be so small that it won't impact your model.

Fair enough. That's all I have. Thank you.

Okay.

Thank you. (Operator Instructions). And we'll go back to the line of Joe Box of Keybanc Capital Markets.

Hi. I know you guys don't give guidance, but it sounds like you have a pretty decent feel of where production is going to be for the year. A lot of different moving pieces on the margin side. I'm just wondering if you could comment do you expect to be profitable this year, break even, or even see some incremental profitability?

I'm afraid we can't comment on that.

All right, that's - that's it for me. I figured it was worth a try. Thanks.

Thank you.

And we have a question from the line of Shaun Nicholson with Kennedy Capital.

Good morning, guys.

Good morning, Shaun.

You know, I saw this article in the Danville newspaper. I don't know if you've - you saw it, Chris, about a comment that was made regarding hiring a lot of people back. I don't know if the source is reliable, but can you speak at all to that? It was about - regarding a three year contract with CSX? Did you see the article?

Can you repeat the question, Shaun?

Oh, sorry. I saw this article in the Danville newspaper about somebody made the comment that you guys would be hiring quite a few people back and then more than you maybe furloughed kind of related to a CSX contract - a three year contract. Have you come across that article or do you have any insight into that?

We're aware of it.

We're aware of it, yes.

Yes, we're aware of it.

We were not consulted when the article was prepared.

Okay, so it's just somebody's insight that they think they have potentially I would imagine?

Yes.

We - you know, we did not participate in the preparation of that article in any way. That was prepared by the paper itself.

Okay. Thanks.

Thanks.

And we'll return to the line of George Pickral with Stephens.

Hey, guys. Any plans to buy back any more stock - personally buy any more stock?

I don't think we can comment on that.

Okay, good enough. Thanks.

And there are no other questions at this time. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Thank you.