FreightCar America Inc (RAIL) 2010 Q3 法說會逐字稿

Ladies and gentlemen, good morning, and welcome to FreightCar America third quarter 2010 earnings conference call. At this time, all participant lines are in a listen-only mode. There will be an opportunity to hear questions at the end of today's presentation. Please note this conference is being recorded. An audio replay of the conference call will be available beginning 1 PM Eastern Daylight Saving Time. until 11.59 Eastern Standard Time December 4, 2010. To access the replay, please dial 1-800-475-6701. The replay pass code is 174781. An audio replay of the call will be available on the Company's website within two days following this earnings call. I would now like to turn the conference call over to Joe McNeely, Chief Financial Officer of FreightCar America. Mr. McNeely, please go ahead.

Thank you, and welcome, everyone. It is my pleasure to be with you as FreightCar America's CFO, and I look forward to meeting and talking with you over the coming weeks.

Joining me today are Ed Whalen, President and CEO of FreightCar America, and Ted Baun, Senior Vice President Marketing and Sales. Ed will give you a update on the Company and the current market in which we are operating. I will briefly review the financial results for the third quarter, and then we will open up the call to your questions.

Before we begin, we would like to remind everyone that statements made during this conference call relating to the Company's expected future performance, future business prospects or events and plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Certain risk and uncertainties may cause forward-looking statements to differ from actual results, including among otherthings the cyclicality of our business; adverse economic and market conditions; fluctuating cost of raw materials, including surcharges; and additional risk factors described in our earnings release for the third quarter 2010 and our annual report on Form 10-K as filed 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 dates to forward-looking statements, whether as a result of new information, future events, or otherwise.

Our earnings release for the third quarter 2010 is posted on the Company's website at www.freightcaramerica.com. I would like to turn the call over to Ed Whalen, our President and CEO.

Thank you, Joe, andand good morning. We would like to welcome you to FreightCar America 2010 earnings call. As Joe indicated, I'm going to discuss the Company's performance in the third quarter, as well as address what we are seeing in the marketplace. But first, I would like to welcome Joe to our organization. All of us at FreightCar look forward to working with him.

Consistent with the last several quarters, our financial results and order activity for the third quarter of 2010 reflect the continued weak condition of the coal car market. Sales revenues in the third quarter were $41.3 million,with a net loss of $4.7 million. Sales in the second quarter of this year were $31 million, resulting in a net loss of $1.3 million. These results reflect a persistently challenging market and overall economic conditions.

There was 17 units ordered in the third quarter of 2010 compared to 14 units ordered in the second quarter of 2010, and no railcars ordered in the third quarter of 2009. We delivered 600 railcars to customers in the third quarter of 2010, all of which were new cars. This compares to 614 railcars delivered in the second quarter of 2010, and 695 railcars delivered in the third quarter of 2009. Our backlog at September 30, 2010, was 2,417 cars, compared to 3,000 units at June 30, 2010. While several key market indicators are trending in the right direction, which I will speak to in greater detail momentarily, we still have limited visibility as to when these measured improvements and market trends will translate into more sustained recovery and normalized levels of new coal car demand.

Moving on to leading indicators for the rail market through late October. Overall commodity loadings for North American rails have improved over the prior year, particularly in chemicals, automotive and agricultural product categories. Loadings for metallic ores and metals have also improved significantly over last year. Loadings for the third quarter were roughly 3% higher than third quarter 2009, with sequential loadings increasing by a like amount from the second quarter to the third quarter of this year.

However, while coal loadings have increased, they have continued to lag behind loadings for other commodities, and on a year to date basis coal loadings for North America are up only 1% compared to the prior year. Also, US electricity generation is up about 5% over the prior year through the end of October. This increase in coal demand for electricity generation, coupled with slower rail transit times, have served to reduce coal stock piles relative to the prior year. More specifically, coal stock piles are generally in line with a five year average at the end of September and some 20% lower than levels of a year ago.

In addition, metallurgical coal exports continue to be quite strong, up some 80% over the prior year. As a result, the number of coal cars and storage appears to have further declined from about 20,000 units at the end of the prior quarter to approximately 10,000 cars at the end of the third quarter. We are encouraged by the direction of these recent trends and are cautiously optimistic that the continuation of these positive trends should eventually lead to improved demand for new coal cars.

In other areas of our operations, our after markets parts business has continued to contribute favorably to our results. We continue to pursue growth opportunities in this business segment, as it is consistent with our broader initiatives to enhance the Company's involvement in the entire railcar lifecycle, to diversify our revenue stream, and limit our exposure to changes in railcar demand.

On the strategic front, importantly, we announced earlier this week that closing of our acquisition of DTE Rail Services. This acquisition furthers the Company's strategic growth initiative to expand our presence in the railcar services sector. Further more, we will continue to seek growth opportunities which expand our capabilities in the aftermarkets parts and repair services sectors. We believe that demand for repairs and maintenance services will be strong in the near term. We also want to be in a position to capitalize on the growth in this market, and believe that railcar services provides synergies with our core of businesses. However, as we have consistently stated, we remain prudent in our approach to growth through acquisitions.

Internationally, we are continuing with our plans to ship a prototype car to India before the end of the year. We continue to believe that there is significant market potential for coal cars in India.

Overall, while market indicators continue to trend in a positive direction, we remain very cautious about the outlook for new coal car orders in the near term, and there are still railcars in storage. With significant lease renewals in the industry over the next 18 months, we anticipate that lease pricing willing remain soft, which in some cases making leasing an attractive shorter term alternative to the purchase of new coal cars.

As a result of persistently challenging market conditions, it is still unclear when sustained demand for new railcars will return. However, long term, we continue to believe that coal will remain a critical element of our national energy supply. Given coal's prominent role and likely continued significant contribution to low cost energy generation, we believe that our customers will continue to seek to replace aging steel-bodied coal cars with new aluminum, hybrid aluminum, and stainless steel and stainless steel-bodied coal cars, which are the core of FreightCar America's product offering.

Given these challenging industry conditions, we continue to focus on optimizing performance and strictly controlling all costs throughout our organization. By focusing on our long-term strategic initiatives and maintaining our strong balance sheet, I am confident we will be a more competitive Company when the market recovers.

Now, I would like to turn the call over to Joe McNeely to address our third quarter financial results.

Thank you, Ed.

As Ed mentioned, we delivered 600 railcars in the third quarter of 2010, all of which were newly built. We delivered 614 new and used cars in the second quarter of this year, and 695 new and used cars in the third quarter of 2009. Deliveries so far this year over 1,535 railcars, compared to 2,680 railcars for the same period last year. Sales revenue for the third quarter of 2010 were $41.3 million, compared to $31 million in the second quarter of this year and $55.1 million in the third quarter of 2009. Year to date revenues for 2010 were $91.9 million, compared to $199 million last year, whichreflects the considerable decline in railcars delivered this year as previously noted.

Gross margin for the third quarter was a negative $0.8 million or negative 2%. This is down from the gross margin of $3.7 million or 12% in the second quarter of this year. The second quarter benefited from a favorable sales mix and a strong performance in our parts business. Gross margin for the third quarter of 2009 was $6.9 million or 13%, as we delivered railcars that were ordered in a much stronger market. Looking forward, we expect new railcar pricing to continue to be very competitive, keeping pressure on margins until demand returns to more normal levels.

Selling general and administrative expenses for the third quarter of this year were $6.5 million, which is up from the second quarter SG&A expenses of $5.8 million. The increase is primarily driven by severance costs and additional professional services incurred in support of our strategic growth efforts. As discussed in prior quarters, we continue to closely manage costs, which has resulted in a decrease in year to date SG&A expenses of 13% from the prior year, due to a reduction in incentive compensation and other reductions, partially offset by the third quarter items previously mentioned.

Our effective tax rate before the third quarter of 2010 was 40.3%, compared to 41.9% for the second quarter of this year. As you know, we are able to deduct the amortization of good will for tax purposes, but we do not amortize this good will for book purposes. This creates a permanent favorable permanent 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 $4.7 million or $0.39 per share in the third quarter of 2010, compared with the loss of $1.3 million or $0.11 per share in the second quarter of this year. And the third quarter of 2009, we earned net income of $1.1 million or $0.09 per share.

Our liquidity position remains strong at the end of the quarter, with cash marketable securities on hand of $96.8 million. This is down from the June 30, 2010, balance of $131.9 million. The decrease reflects our use of cash for theadvanced purchase of materials to lock in our material costs. Additionally, on November 1, we used $23.3 million of cash, to fund the acquisition of the assets of DTE RailServices previously addressed by Ed. We expect our cash position to remain strong, and our revolving credit facility remains undrawn.

The value of our railcars under lease was essentially unchanged from last quarter at $65.9 million. In the current leasing environment, we do not expect our investment in lease cars to change significantly over the balance of 2010.

That ends our prepared comments, and we are ready to open up the call for questions.

(Operator Instructions). Our first question will come from line of Michael Gallo with CL King. Please go ahead.

Hi, good morning.

Hello.

Just the question in terms of what you are seeing of late. Any signs that inquiries are starting to improve? Certainly some of the commentary on the -- from the railroads suggests their starting to work out those cars in storage, even on the coal side, which you alluded to. Are people starting to talk about needing some coal cars as they look to 2011, or is it still very uncertain on that front?

Why don't I let Ted address that issue.

Yes, Michael, inquiries for coal cars are somewhat low, but they are trending higher. To answer your question, we are seeing inquiries for some of the non-coal products increase at a slightly higher rate than coal, but it does seem like there is more of a transactional base to inquiries. Certainly no speculation at this point. And the other comment I would make is we still see, even though there have been a number of cars come out of storage, there still is quite a fluid market for the leasing of coal cars. So that is still going on. We still have lessees trying to take opportunistic advantage of low lease rates, and until that supply -- which is showing promise -- until that supply goes -- comes down a little further, it's still going to be a challenging market for new coal car orders.

Great. Question just on the gross margin line. Obviously it was negative in the quarter, what was the contribution, if it is possible to break out, from parts and services? Just trying to understand what the core gross margin was on the manufacturing side of things. And would you expect that number to be negative going forward? I mean, obviously that has bounced around quite a bit quarter to quarter.

Michael, this is Joe McNeely. As you probably know in the past, we don't give out specific break down of our gross margin for competitive reasons. I think there is -- in this quarter there were some things running through our margin that we probably don't expect to see going forward. But that's about as much guidance as we are prepared to give.

Fair to assume, just take your comments here -- obviously you will have the impact of DTE in the fourth quarter as well, but we should expect a gross margin percentage to improve, even assuming a similar level of manufacturing revenue. Is that fair?

Well, as we have indicated in our previous press release on DTE, we do expect that to be accretive. In terms of the other margin comments, we will not comment.

Thank you.

All right, our next question is Paul Bodnar with Longbow Research.

Good morning, guys.

Hi, Paul, how are you?

Pretty good. I wonder I could get a little bit on the lease fleet that you have there. You said that you didn't plan on doing anything by the end of the year. Is that something we should really expect you to hold on to until we see car prices start to improve? Because I think remember that what you had left over was a little less profitable than the cars you had sold off?

Yes, I think -- we continue to look for opportunities to monetize the lease fleet. And we continue to do that, I would say that the activity hasn't been particularly strong in recent months here. So -- but we will continue to do that in the fourth quarter.

Okay, and any kind of update you can give us on what is going on with India?

I'm sorry, I didn't -- what was the question?

With India. Your joint venture there.

On -- the question was --

Just a update on --

Oh, update. I didn't pick that up. Essentially we plan to deliver the prototype car there in the fourth quarter, and then it is going to go through a testing regime that could be -- it's going to be quite significant in time-wise. And so we're preparing to do that now, and we will go forward from there. But that's what is upcoming in India. I don't expect -- I would think it is unlikely that we would see any revenue impact from India in 2011.

Okay that was kind of my next question. Thank as lot, and I'll just back into queue here.

You're welcome.

Now question from [Alexandar Walsh] with KeyBanc Capital.

Good morning, guys. As we are looking at about 2,400 cars left in the CSX order, I was wondering if you could comment on the cadence of that -- the delivery cadence of that order?

I think you have seen the deliveries in the third quarter, and we would expect a similar rate of delivery in the fourth quarter.

Okay. And given that some of the major steel suppliers have been recently talking about pushing through some higher iron ore and met coal prices, how well would you say you guys are positioned to pass through -- I guess in the event that steel prices were to increase, how well would you say you are positioned to pass through that into backlog? On the orders on backlog?

As Joe pointed out earlier, we have taken steps to protect our material costs in the backlog, so we do not have material log risk in our backlog.

All right. Thanks. And just turning to working capital. Going forward as we move through this large coal car order, should we expect to see inventories to continue to ramp, or is this around the right level for you guys?

At this point, it's probably at the right level, and then if some of those advance purchases [will burn off] as we deliver cars for our backlog.

Thank you. I'll jump back in queue.

Thank you.

All right. A question from the line of George Pickral with Stephens Incorporated. Please go ahead.

Hey, it's [William Horner] on for George. Most of my questions have been answered, but I wanted to get a little clarity on the production levels going forward. I know you said probably similar run rate in Q4, which implies an acceleration of production in the first half of 2011 based on the 3,000 car order. So could you give a little guidance on what kind of costs we should expect to see coming back with that ramp up? Is 600 kind of the current production capacity? And just kind of what call structure we'd see with the ramped up order?

I guess maybe I was unclear, but you should not expect to see a change in the rate of production on this order.

Okay.

Okay?

That's it. Thank you.

You're welcome.

(Operator Instructions). Now question from the line of Bill Nasgovitz from Heartland Funds. Please go ahead.

Okay, thank you very much --

Good morning.

Good morning.

Hi, Ed. Just had a quick question. Do you have any color on the age of the fleet in North America today?

It's a roughly 25 years of age. Overall. On average.

And you talked a little bit about the inquiries picking up here. Still soft, but when you look at overall, you had the order -- when was the CSX order announced?

I believe that was the first quarter of 2010.

The first quarter, okay.

Yes.

Thank you very much.

You're welcome.

Now another question from the line of Paul Bodnar with Longbow Research. Please go ahead.

Yes, I just wanted to ask a little bit about the cars in storage. And I have had some commentary that the cars in storage, particularly some of these old steel cars, are in pretty poor shape, and either, one, would need a lot of work to get back on the railroads, or two, would just be replaced. I don't know if we're at those are levels that we're dealing with that type of car, or if they're still good cars coming out? Or perhaps just kind of where we're at and what to expect there?

Yes. I will say this, for the past three or four years we have seen above average scrappage, so a lot of the cars you are referring to that aren't in good shape have been taken out of the system. I'm sure there still remains some cars, but I would say that as cars have come out, they are probably -- the ones that are left for the most part are serviceable cars.

Okay. That's helpful. Thanks.

Thank you.

Right know a question from the line of Alexandar Walsh with KeyBanc Capital. Please go ahead.

Hi, guys. I just had a quick follow up. I was wondering the CSX order, is that expected to ship through the first half of 2011?

Yes. It should continue in through the first half of 2011.

Is it expected to conclude at the first half -- or the end of the first half?

Yes.

Okay, thank you.

(Operator Instructions). And right now there are no more questions in queue on the phone line.

Okay, thank you very much for joining the call, and we look forward to speaking with you again at the end of the next quarter. Thank you.

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