FreightCar America Inc (RAIL) 2010 Q2 法說會逐字稿

Ladies and gentlemen, good morning and welcome to FreightCar America's second-quarter 2010 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 September 5, 2010. To access the replay, please dial 800-475-6701. The replay access code is 166191. 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 second quarter of 2010, 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 second 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 second-quarter 2010 earnings call. I am going to discuss the Company's performance in the second quarter, as well as address what we are seeing in the marketplace. Following my comments, Chris will provide a detailed review of our financial performance.

As you can see, our financial results and order activity for the second quarter of 2010 continued to reflect the weak condition of the new coal car market. Sales revenues in the second quarter were $31 million, with a net loss of $1.3 million. Sales in the first quarter of this year were $19.5 million, resulting in a net loss of $3.3 million, which translates into a slight sequential improvement in sales and earnings. However, as highlighted in our earnings release today, demand for new coal cars is still weak.

We received orders for 14 rail cars in the second quarter of this year compared to 3,656 rail cars in the first quarter, 3,000 of which will be built and delivered in the second half of this year and the first half of next year. We delivered 614 rail cars in the second quarter, consisting of 160 new cars, 440 used cars, and 14 cars delivered under leases. We delivered 321 rail cars in the first quarter of this year. Our backlog at June 30, 2010 was 3,000 cars compared to 3,600 cars at March 31, 2010. We are hopeful that market indicators are trending towards an improvement in demand, but at this point in the recovery, the picture remains fairly unclear.

Moving on to leading indicators for the rail market through mid-July, overall commodity loadings for North American rails have improved over the prior year, particularly in the grain and chemical categories. Loadings for ores and minerals have also improved over last year. However, unlike prior economic recoveries, coal loadings have lagged behind loadings for other commodities. Year-to-date coal loadings are still flat compared to the prior year and, sequentially, second-quarter coal loadings were flat compared to the first quarter.

While we remain cautious regarding an overall industry recovery, there have been a few positive signs developing in the coal market. Loadings for the second quarter were 6% higher than second quarter 2009 when activity rapidly deteriorated. So we do seem to be above that low point in the industry cycle.

Also, US electric generation is 5% above the prior year through the end of July. This increase in coal demand for electricity generation, coupled with coal loadings that are relatively flat year over year, is serving to reduce coal stockpiles. We see this as an encouraging sign. While still ahead of the 10-year average at the end of July, coal stockpiles are 16% lower than last year. In additional, metallurgical coal exports continued to be very robust, up 114% over prior years. As a result, the number of coal cars in storage appears to have further declined from about 25,000 units last quarter to about 20,000 cars this quarter. We are optimistic that the continuation of these positive trends I have just noted should serve to further reduce the number of cars in storage, which in turn should eventually improve the demand for new coal cars.

In other parts of the business, our aftermarkets parts business continued to grow quite nicely, experiencing a strong quarter with sales up slightly over 10% compared to the first quarter of this year. The strength of this business also contributed to our improved margin this quarter. We continue to pursue this business segment as it allows us to diversify our revenue stream and limit our exposure to changes in railcar demand.

Internationally we are continuing with our plans to have a prototype car in the Indian market before the end of this year. We are focused on this initiative and are working as quickly as possible to gain the required approval to allow us to begin manufacturing and selling coal cars in this market. We remain optimistic about opportunities to export our coal cars to markets outside the US and we believe that the market potential for coal cars in India continues to be very strong.

Overall, while there are some positive trends gradually developing in the market, we remain very cautious about the outlook for new coal cars in the near term. The fact of the matter remains that there are still excess rail cars in storage. With significant renewals in 2010 and '11 keeping the lease pricing soft, which in some cases makes leasing an attractive, shorter-term alternate to the purchase of new rail cars, the leased market for coal cars remains weak as well.

As a result of these difficult market conditions, we continue to believe that we have little visibility as to when sustained demand for new coal cars will return. However, longer term we believe that coal will remain a critical element of our national energy supply for the foreseeable future. Given coal's prominent 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 body cars.

However, in the near term, given the challenging industry conditions, we continue to focus on optimizing performance and strictly controlling all costs throughout the organization. I am confident we will be well positioned to capitalize on the market recovery when it occurs.

To further strengthen the business and capitalize on growth opportunities, we continue to evaluate opportunities to acquire additional capabilities in the aftermarket parts and repair services sector. We believe that demand for repairs and maintenance services will be strong in the near term. We want to be in a position to capitalize on the growth in the market and believe these kinds of assets provide synergies for our business. However, as we have consistently stated, we remain prudent in our approach to growth through acquisitions.

Now I'd like to turn the call over to Chris Nagel to address our second-quarter financial results in more detail.

Thank you, Ed.

As Ed mentioned, we delivered 614 railcars in the second quarter of 2010, including the delivery of 440 used cars we had previously taken in on trade and 14 cars on lease. We delivered 321 cars in the first quarter of this year, 145 of which were new cars, 100 of which were used cars, and 76 of which were cars delivered under leases. In the second quarter of 2009 we delivered 743 new cars, 21 used cars and 345 cars under lease for a total of 1,109 cars delivered.

Turning to our financial results, our sales revenues for the second quarter of 2010 were $31 million compared to $19.5 million in the first quarter of this year and $104.3 million in the second quarter of 2009. Year-to-date revenues for 2010 were $50.5 million compared to $143.9 million last year, reflecting the considerable decline in rail cars delivered this year. Deliveries so far this year were 935 rail cars compared to 1,985 rail cars for the first half of last year.

Gross margin for the second quarter was $3.7 million, or 11.8%. We had a favorable sales mix this quarter and, as Ed previously mentioned, strong performance in our parts business. Gross margin in the first quarter of this year was essentially breakeven, while gross margin for the second quarter of 2009 was $16 million, or 15.3%. Looking forward, we expect railcar pricing to continue to be very competitive, keeping downward pressure on margins until demand returns to more normalized levels.

Selling, general and administrative expenses for the second quarter of this year were $5.8 million, which is essentially flat with the first-quarter SG&A expenses of $5.7 million, but down 14% from second quarter of 2009 SG&A expenses of $6.7 million. Year-to-date SG&A expenses are down 18% from the prior year. The decrease in SG&A year over year is due in part to a reduction in incentive compensation for this year and reflects the cost controls put in place as we progress through this extended downturn.

Our effective tax rate for the second quarter of 2010 was 41.9% compared to 44.7% for the first quarter of this year and 24.5% for the second quarter of 2009. As you know, we are able to deduct amortization of goodwill for tax purposes, but we do not amortize this good will for book purposes. This creates a permanent favorable tax item which serves to increase our effective tax rate in periods of loss and reduce our effective tax rate in periods of profitability.

We incurred a net loss of $1.3 million, or $0.11 per share, in the second quarter of 2010 compared to a loss of $3.3 million, or $0.28 per share in the first quarter of this year. In the second quarter of 2009 we earned net income of $7.0 million, or $0.59 per share.

Our liquidity position remained strong at the end of the quarter with cash and marketable securities on hand of $132 million as of June 30, 2010 compared to $139 million as of March 31, 2010. However, we do anticipate that we will begin to use cash in the second half of this year to fund an increase in inventory and accounts receivable in connection with the rail cars we will manufacture and deliver during the period, and as we deliver railcars against a $28 million prepayment we received earlier this year.

The value of total railcars under lease was $66.5 million as of June 30, 2010 compared to $65.9 million as of March 31, 2010. In the current leasing environment we continue to believe that our investment in leased cars will not change significantly over the course of the year.

I thought I would also make a few comments regarding the new credit facility that we announced on July 30th. As you saw in the announcement we entered into a new $30 million revolving credit facility and cancelled our two previous credit facilities. The new facility is asset-based and will help provide financial flexibility if working capital demands become more significant as the market recovers. We also think that we right-sized the facility to our specific needs, reducing the size of the commitment and the associated fees to help us continue to reduce costs.

And with that, we're ready to address your questions.

Thank you. (Operator instructions.) Mike Gallo; CL King.

Couple questions -- how many of those 3,000 cars in backlog at the end of Q2 do you expect will ship this year?

We're not going to give guidance on that matter. We've indicated they'll be spread over -- I think Chris indicated they'd be spread between this year and the first half of next year.

Right. Okay. Just wanted to just touch into a little bit of your comments about some of the emerging trends. Clearly cars in storage down, loadings of some type certainly moving up. Are you starting to see that manifest itself in more inquiries? Obviously you don't have orders to show for -- I mean, at what point -- this is always a tough question to answer. I know you noted coal cars in storage were down to about 20,000. What do you think a normal level for that would be? Thank you.

Yes. Hi, this is Ted Baun. We are seeing a slight uptick in inquiries. But a lot of what we see are just folks still trying to take advantage of the existing equipment in the market, particularly the coal cars. So folks are looking to do the two-to-five-year lease on cars that might be five years or less in age. So it's still a little bit of opportunistic demand, where they might want to replace their 10-year-old set with a 3-year-old set or something like that. But as far as economic growth driving inquiries, we're seeing a little bit of that, but not a whole lot at this point.

Any comment on the potential -- obviously there's been some talk about some legislation or some tax credits circling around in Congress. Is that something you think has a reasonable shot of occurring in the back half or is it still much too early to say?

There are several bills that are continued to be pending and they've gradually gained additional support since our last call. It appears now that as a result of the current political winds in Washington that things are looking to be on hold until the fall elections are completed and then things may begin to pick up again after that. The bills are still being actively pursued on the part of those that are interested in them. And I just think that there's difficulty in Congress acting on them prior to the election at this point in time.

Obviously that's coming up. But just my recollection the bills have had fairly bipartisan report, didn't they?

Yes, they do.

Great. Thanks a lot.

George Pickral; Stephens.

To follow up on that last question, do you think the fact that this bill has bipartisan support and may pass, albeit not for another 9 to 12 months likely, do you think that's holding back customers and their willingness to buy cars today?

No, I don't believe so.

Okay. And then, switching over to the orders that you'll be -- the cars you'll be building for CSX, do you have the manpower in place to build these cars? Or should we expect to see a pickup in SG&A as you bring people back for the --

We will certainly be bringing back hourly folks to do that, but you should not see a variance in our SG&A.

Okay. And then lastly, kind of bigger picture, can you maybe talk about the acquisition environment, specifically for the repair and refurb business? Kind of, have prices been moving up? Have they been moving down? And have people been more or less willing to sell, given that the fundamentals in the business right now are pretty strong.

I guess I really don't have a comment on that. I guess I just have to say I can't comment right now.

Okay. Thanks for the time.

(Operator instructions.) Steve Barger; KeyBanc Capital Markets.

This is actually [Alex Walsh] in for Steve. I was just wondering if you could provide a little bit more color on what really drove the favorable sales mix that you mentioned in the press release? I was wondering if it was more a function of possibly previously placed orders aside from the large CSX order or possibly higher percentage of parts and service revenue?

The combination of previously placed orders and a strong aftermarkets part market.

We didn't ship any cars under the CSX order in the second quarter.

Okay, thank you. Additionally, now that we have a little bit more production visibility over the next four quarters with the large order that we have, do you expect pricing to remain pretty competitive throughout 2011 as well?

I guess I have relatively little visibility on 2011. I think certainly what we're seeing so far is that pricing still has remained very competitive at this point in time. And I expect that to continue certainly at least through the end of this year.

Okay, thank you. That about wraps it up for me.

[Delmer] Smith; Farallon Capital.

It's actually Lee Hicks. But, quick question on the new credit facility that you guys lined up -- what drove that decision? Because if I remember right, the ones you replaced didn't expire for a couple more years.

Well, actually, Lee, the possible revolving -- borrowing period on the revolver was set to expire here in a few months. And we just felt like there was an opportunity to -- it was --there was a lot of unused capacity that we were paying for. So we had an opportunity we felt like to reset it right now in this marketplace. And if -- and we still feel if we need greater capacity we could go back and expand as needed.

And I don't know if you filed the agreement yet or not, so I apologize if you have, but were there any changes in the covenants or change in control clauses?

Yes, they're filed. They were filed last week as part of the 8-K. There is a slight change to the covenant structure, yes. There was a -- there's only one financial covenant under the current one and there were a few more covenants under the prior facility. So there was a change there, yes.

That's it for me. Thank you.

George Pickral; Stephens.

One follow-up question, [men]. Or Ed, maybe this would be better for you. Historically, when you look back at both coal stock piles and idled cars, at what point in previous cycles have companies started buying cars again? I guess maybe a better way to ask is that stockpiles are kind of near normal. Do we need to see them below normal levels for a certain period of time before we start to see new car orders?

Well, actually they still remain -- if you look at historic norms there, even though they've come down quite a bit they're still fairly well above historical averages.

Sorry. I guess the general consensus from the Class 1's is that they're heading back towards normal --

Right.

-- and might be normal by the end of the year.

I agree. And so you certainly need to see them at least at a normal level. And it's usually helpful for them to fall below normal because that's what stimulates people to go out and buy more cars, for people that aren't buying cars specifically for a particular plant expansion or something like that. So it certainly would be helpful if those stockpiles fell below normal, yes.

Do they need to stay below normal for a couple months before people start buying, or is it --

Well, it has to -- it'll take -- people have to get the feeling that this is not a short-term event and that they need additional capacity before they go out and either lease or buy new cars. So, yes, there has to be some period of time where they feel uncomfortable that they're not going to be able to maintain stockpiles before they would make a general purchase.

Okay. Good color. Thank you for that, Ed.

Mike Gallo; CL King.

I just had a follow-up question for Chris. Chris, can you remind us how much you were paying in commitment fees in total on the two facilities that were replaced on an annualized basis? And then, my recollection is on the new one it's 35 basis points. Is that right?

Yes. We were paying around 50 basis points on the previous.

Fifty. And what was the total between the two -- remind me?

The total of capacity was $110 million between the --

$110 million. Great. Thanks a lot.

Steve Barger; KeyBanc Capital Markets.

Just had one follow-up. If I heard correctly, you said out of the large order from last quarter, none of them were shipped this quarter?

That's correct.

How is that possible when you consider the backlog from the prior quarter was about half what was shipped now?

No, the prior backlog was 3,600 units.

This is prior to the backlog of last quarter.

The backlog at the end of the first quarter was 3,656 or something like that.

I'm just asking about before that.

The backlog before that --

I was -- I guess I didn't probably word my first question properly. I was more curious about the orders that came from the backlog prior to Q1, or what was (inaudible - multiple speakers.)

The backlog at the end of the year was very small, with a few hundred cars. Got a large order -- we got the large 3,000-car-plus order in the first quarter, but that was not due to start shipping, as we've said, until the second half of this year.

Okay. So then of the 614 cars, where did that come from if the backlog was so small at the end of the year?

Well, we enumerated that the deliveries were primarily from used --

440 of them were used cars and the remainder were new cars.

Oh, okay, that helps. Thank you.

Kristine Kubacki; Avondale Partners.

Just a question on -- you talked about the last quarter that there was older contracts that you were working off and that there was the parts and services contribution. As we think about going forward here and the start of the CSX contract, will the mix directionally stay favorable, or do you think it will be -- it could weaken as we go into the back half of the year?

I mean, really, as you can see, it's clear right now the only thing we have in backlog is that large order, which has already been priced. So if there are no further orders that we gain in the second half to be delivered in the second half, the only thing you'll see in revenue is you'll see parts revenue and then you'll see us begin to ship against that large order, along with some lease revenue. So there won't be a lot of moving parts in the second half unless we get some additional orders.

Okay. But directionally, will it be less favorable or more favorable or the same as the second quarter, in terms of gross margin mix?

Well, I would expect you to see -- I would expect we'll see some downward pressure on margin in the second half.

Okay. Fair enough. Thank you very much.

(Operator instructions.) And we have no further questions in queue.

Okay. Thank you very much.

Thank you, everyone.

See you next quarter.

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.