FreightCar America Inc (RAIL) 2010 Q4 法說會逐字稿

Welcome to the FreightCar America's fourth quarter 2010 earnings conference call and webcast. At this time, all participant lines are in a listen-only mode. For those of you participating on the conference call, there will be an opportunity for questions at the end of today's presentation. Please note that this conference call is being recorded. An audio replay of this conference call will be available from 1 PM Eastern Standard Time today until 11.59 PM Eastern Daylight Savings Time on March 17, 2011. To access the replay please dial 1-800-475-6701. The replay passcode is 190785. 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 call over to Joe McNeely, Chief Financial Officer of FreightCar America.

Thank you and welcome, everyone, to FreightCar America's fourth quarter earnings conference call and webcast. Joining me today is Ed Whalen, President and CEO of FreightCar America. Ed will give you an update on the Company and the current market in which we're operating. I will briefly review the financial results for the fourth quarter and full year 2010. Then we'll open up the call to your questions. Before we begin, I 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 risks and uncertainties may cause forward-looking statements to differ from actual results, including, among other things, the cyclicality our business, adverse economic and market conditions, the fluctuating cost of raw materials, including surcharges, and additional risk factors described in our earnings release for the fourth quarter of 2010 and on our Annual Report 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 fourth quarter of 2010 is posted on the Company's website at www.freightcaramerica.com. I'd now like to turn the call over to Ed Whalen, our President and CEO.

Thank you, Joe, and good morning. We would like to welcome you to FreightCar America's fourth quarter 2010 earnings call. I am going to discuss the Company's performance in the fourth quarter, as well as address what we are seeing in the marketplace. Consistent with the last several quarters, our financial results and order activity for the fourth quarter of 2010 reflect the continuing challenging condition of the coal car market. Sales and revenues in the fourth quarter were $51 million with a net loss of $3.5 million. Sales in the third quarter of 2010 were $41.3 million, resulting in a net loss of $4.7 million. There were 331 railcars ordered in the fourth quarter of 2010, compared to 17 railcars ordered in the third quarter of 2010 and 185 railcars ordered in the fourth quarter of 2009.

I am pleased to note that so far in 2011, the Company has received additional orders for more than 3,000 new railcars to be manufactured and delivered over the course of 2011 and 2012. We delivered 694 railcars in the fourth quarter of 2010, all of which were new cars. This compares to 600 railcars delivered in the third quarter of 2010 and 697 railcars delivered in fourth quarter of 2009. Our backlog at December 31, 2010, was 2,054 railcars compared to 2,417 railcars at September 30, 2010. The backlog of unfulfilled orders, as of December 31, 2009, was 265 railcars. We still have limited visibility as to when sustained levels of new coal car demand will occur.

However, we feel the market indicators continue to trend in the right direction. For example, North American commodity loadings in the fourth quarter and for the full year 2010 continue to positive trend over the prior year, particularly in chemicals, metallic ores, and metal product categories. Loadings for the fourth quarter were roughly 8% higher than fourth-quarter 2009, and full-year 2010 rail commodities loadings were up about 9% over full-year 2009. While coal loadings have increased, they have continued to lag behind loadings for other commodities. More specifically, coal loadings for the fourth quarter were roughly 6% higher than the fourth quarter of 2009; but for the full year, coal loadings increased only 2% in 2010 when compared to the prior year. From a demand standpoint, US electricity generation in 2010 increased roughly 4% over the prior year. This increase in demand has served to reduce coal stockpiles relative to the prior year by 12% as of November 2010, which remains in line with the average November levels for the last five years.

Coal exports have continued in robust fashion with metallurgical coal exports up 51% for 2010 when compared to 2009. Total coal exports in 2010 were up 38% from the prior year. As a result of increased demand and slower rail transit times, the number of coal cars in storage appears to have further declined, albeit at a slower rate, from about 10,000 railcars at the end of the third quarter 2010 to approximately 8,000 railcars at the end of 2010. We are encouraged by the direction of these market indicators, and expect that these trends will lead to improved demand for new coal cars over the long term. With respect to our recent acquisition, the integration of FreightCar Rail Services, formerly DTE Rail Services, is progressing as planned and it is performing as anticipated. We believe that demand for repairs and maintenance services will be strong in the near term, and we want to be in a position to capitalize on the growth in this market. It is our view that there are clear synergies between our railcar services and our core business.

The DTE Rail Services acquisition was the first step toward our strategic growth objective to serve our customers through the entire railcar life cycle. This will help reduce our exposure to changes in new railcar demand. We will continue to seek additional growth opportunities to expand our capabilities in the service, repair, and maintenance and parts businesses. However, as we have constantly stated, we remain prudent in our approach to growing through acquisitions. We continue to work with our joint-venture partner in India and with applicable Indian regulatory authorities to gain approval for our coal car design, and believe that there is significant market potential for coal cars in India. Overall, while recent order activity and the general trends and market indicators are cause for optimism, we remain cautious about the sustained demand for new coal car orders in the near term. For example, while the absolute number of railcars in storage is dropping, there remains excess equipment in storage.

In addition, lease rates, while improving, are still below normal long-term rates which in some cases positions leasing as an attractive shorter-term alternative to the purchase of new railcars. While it is still unclear when sustained demand for new coal cars will return, we continue to believe that coal will remain a critical element of our national long-term energy supply. Given coal's significant contribution to low-cost energy generation, we believe that our customers will continue to replace aging steel-bodied coal cars with new modern high-capacity coal cars, which are the core of FreightCar America's product offering. In light of the current market conditions, we believe margins will remain under pressure in the near term. As a result, we will continue to focus on optimizing performance and strictly controlling all costs throughout our organization by forecasting on long-term strategic initiatives and maintaining our strong balance sheet. I am confident that we'll be a more competitive company when sustained railcar demand returns. Now, I would like to turn the call over to Joe McNeely to address our fourth-quarter and full-year financial results.

Thank you, Ed. As Ed mentioned, we delivered 694 railcars in the fourth quarter of 2010, all of which were newly built. We delivered 600 new railcars in the third quarter of 2010, and 697 new and used cars in the fourth quarter of 2009. Deliveries for the year were 2,229 railcars compared to 3,377 railcars in 2009. Sales revenue for the fourth quarter of 2010 were $51 million compared to $41 million in the third quarter of 2010, and $49 million in the fourth quarter of 2009. 2010 full-year revenues were $143 million compared to $249 million in 2009. This decrease reflects the considerable decline in railcar deliveries in 2010, as noted previously.

Gross profit for the fourth quarter was about breakeven, which is slightly better than the negative gross profit of $1 million or negative 2% experienced in the third quarter of 2010. Gross profit for the fourth quarter of 2009 was $3 million or 7%. Gross profits in 2010 continue to be negatively impacted by the underutilization of our fixed manufacturing capacity, due to the low production volumes and also lower sales prices, due to the competitive pressures of the current depressed coal car market. Looking forward, we expect recent orders to improve the utilization of our manufacturing capacity, but we also expect new railcar pricing will remain very competitive, keeping pressure on margins until demand returns to more normalized levels. Selling, general, and administrative expenses for the fourth quarter of 2010 were $7 million which is unchanged from the third quarter. As discussed in prior quarters, we continue to closely manage costs, which has resulted in a decrease in full-year SG&A expenses of 21% from the prior year. The decrease in SG&A year-over-year is due in part to a reduction in incentive compensation, cost controls previously put in place, and lower severance costs in 2010.

These reductions were partially offset by higher consulting costs in 2010. Our effective tax rate for the fourth quarter of 2010 was 43.4% compared to 40.3% in the third quarter of 2010. As you know, we are able to deduct the amortization of goodwill for tax purposes, but we do not amortize this goodwill for book. 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 $3.5 million or negative $0.29 per share in the fourth quarter of 2010, compared to a loss of $4.7 million or negative $0.39 per share in the third quarter of 2010. In the fourth quarter of 2009, we had a net loss of $5.5 million or negative $0.47 per share. Our financial position continues to be strong with cash on hand of $64 million at the end of the year.

This is down from the third-quarter balance of $97 million. The decrease reflects the purchase of the business assets of DTE Rail Services for $23 million, and the advance purchase of materials for recent orders. As we have said before, this locks in the price on material we will use in our production. We expect our cash position to remain strong and we have no current plans to draw upon our revolving credit facility. Lastly, the value of railcars under-leased at year-end was unchanged from the prior quarter at $65 million. In the current leasing environment, we continue to believe that our investment in leased railcars will not change significantly over the course of 2011. That ends our prepared comments and we're now ready to address your questions.

(Operator Instructions)Our first question from Mike Gallo. Please go ahead.

Hi, good morning.

Good morning, Mike.

Good morning.

Question I have, just obviously encouraging to see the improvement in orders here so far in the first quarter. I was wondering whether you can comment at all about whether you're starting to see increased levels of inquiries? Whether there was anything in that one large order that is unusual or whether you're starting to see just some signs of broader interest in purchasing coal cars?

I think we're seeing somewhat of an increase in inquiries overall. Coal inquiries are not up substantially from third quarter, I would say.

But some of those obviously translating into orders? I mean, you just look at the 3,000 cars that you booked so far in Q1, was that reflective of one or two large orders or people just starting to order some cars more broadly or just a little bit more information on that?

There's several customers involved, but there is one large order in the total.

All right, okay. Second question I have is just on the margins. Obviously the gross margins have been under pressure, expectedly, given the pricing pressure and the lack of utilization. So, when you look at the orders you're booking to date in 2011, are you seeing some improvement in the margin rate? Obviously a year ago it was a very, very competitive environment for orders and while it's likely still competitive, directionally has it gotten better?

Mike, I think we don't give out individual guidance on specific orders. I think as a general trend, as production volumes go up, we will utilize our overhead capacity, which will help margins as we go forward. But we don't comment on individual profitability on individual orders.

All right. Okay. Thank you.

And our next question comes from the line of Brad Delco with Stephens. Please go ahead.

Good morning, Brad.

Good morning, Joe.

Good morning.

Question first on the bonus depreciation that people get to take advantage of here in 2011. How do you see that impacting the orders that -- to kind of follow up on that inquiry question from before, do you think that could be something that drives more orders at the back part of the -- back end of the year?Or do you see people trying to utilize that to increase their orders in 2010 and 2011? What impact do you think that could have on your business?

This is Ed, Brad. Certainly I think that the ability to write off the entire asset in 2010 is a positive and it's going to encourage customers that were on the fence, or had interest in acquiring cars anyway, to go ahead and purchase the cars. So, I think there will probably be a pull forward effect.

And, Brad --

But something maybe that plays out in the back part -- back end of the year?

I think timing of that will depend on who that is and where they're at in their capital plan. Again, certain things have to be right for somebody to take advantage of that, one, they have to have the capital to buy the equipment, two, they have to have the tax capacity. So, that probably eliminates some people from taking advantage of it.

Got you. And then my next question, thinking about maybe what the contribution was from the acquisition on the fourth quarter on similar year-over-year volumes, it looks like pricing was down pretty dramatically year-over-year. First question is, how do we think about the seasonality of that business going into 2011 and the impact on your revenues?And then, am I reading into it correctly that pricing was down maybe mid- to high single digits year-over-year on the cars that you sold?

Let me, Brad, I think there was two questions, make sure I got it. The first question is the utilization of the railcar repair business?

Yes.

That business has remained relatively highly utilized and -- from a capacity standpoint. And there is usually some seasonality, but for our business, given where they're positioned, they stay pretty highly utilized throughout the year. In terms of pricing on individual orders that we've got in, again, we don't give out that type of detail on the call.

Got you. I guess my question is more so, I think your release said it was about $25 million on an annualized basis. Should we assume that's fairly equally distributed throughout each quarter this year?

Yes. I think the revenue is pretty consistent month-to-month, quarter-to-quarter.

Okay, great. Thanks for the time, guys.

(Operator Instructions)Our next question is from Jeff Matthews with Ram Partners. Please go ahead.

Hi. Thanks very much. I just wondered if this sort of 10X increase sequentially in orders is kind of the normal thing you see at the start of a cycle or is this a one off? Or how do you interpret it? Thank you.

Again, I think as we had mentioned in prior calls, orders in this business are very lumpy and they can go up and down quarter-to-quarter based on individual customers' capital plans and demands and so forth. So, I don't think you can draw a conclusion from the fact that we were fortunate enough to receive these orders at this point in the first quarter. It's -- I don't think it's indicative of a trend. It's fairly lumpy and orders can vary considerably from quarter to quarter.

Hello?Did that answer your question, Jeff? Hello? Are we cut off?

I'm sorry.His line's open again.

Yes. I guess I'm just trying to pair that with what you read from the major railroad companies that are indeed saying that they're starting to spend again. And it would seem to be -- it would seem to suggest that the macro environment is different today than a year ago. Is that --

No, I think, as I mentioned earlier, the trends are certainly positive. We made a lot of progress and we're at the very early edge of seeing that trickle down to suppliers like ourselves, but I think it's positive. It's just too early to say how fast and -- how fast that's going to ramp up and what that trend might be.

And how sustained those order levels are.

Understood. Okay. And then could you just compare your particular market position today versus the start of a previous cycle? Are you in better shape, do you think, than you might have been previously, relative to competition? Thank you.

I think it's pretty difficult. This cycle is much more subdued than we've seen in the several prior cycles. Traditionally, coal has led out of the cycle in prior recoveries as the economy improved. And coal is, as we noted earlier, somewhat lagging this time. So, I think it's going to be a more subdued pullout in the coal business than maybe we have seen in prior cycles just because the recovery is a lot more subdued than we've seen in the past.

In terms of our cost structure, we did take a number of actions in the past couple years, including shutting down a facility. So, from a cost structure perspective, hopefully we'll get a little more operating leverage as the orders come back.

Understood. Thank you very much.

You're welcome.

Our next question comes from the line of Brad Evans with Heartland. Please go ahead.

Good morning, Ed.

Good morning, Brad. How are you?

Doing well, thanks. How about yourself?

Very well.

Great. Just the 8,000 cars in storage you cited, I'm curious how you view the dynamics there of those cars coming back into service versus being scrapped in light of high steel prices today?

Actually, a large majority of those cars, based on our survey, are aluminum cars. So, I wouldn't expect to see too many of them be scrapped out.

Okay. And then further along that thought process, with steel prices and aluminum prices moving higher, does that influence your customers' decision at this point to place orders at this point in the cycle?

I think with the raw material prices increasing as they have, that certainly encourages them to, if they have capital plans to do this, to go ahead and place their orders, yes.

Okay. I'm just curious as to -- could you just walk us through the export market in terms of your thoughts in terms of how many additional cars might be required to serve growing exports of both thermal and metallurgical coal in 2011 and 2012?

It's difficult to say. Again, the export volumes have grown rather dramatically and clearly, that's not sustainable. That rate of growth is not sustainable. It's probably going to taper off considerably early in the first part of this year and obviously, it's currently being served with cars. So, that market is primarily going to be a replacement market over time versus cars needed to address the growth in the exports.

I'm sorry, why do you expect it to taper off?

Well, it's -- a 38% year-over-year increase is not sustainable. The volume will probably maintain or grow slightly, but you can't have 38% year-over-year growth in exportation of coal. We just can't support that level of production.

Aren't there a number of loadout facilities though, that are intending to allow for greater exports of US coal?

If the facilities are capable, yes, that's fine.

Yes, I think, Brad, I think in the absolute, volume numbers are anticipated to be steady and to go up some. I think what Ed's commenting on is the rate of growth of a 38%, that can't be sustained. Though I think most people are predicting some moderate growth here over the next year.

Okay. I just have two other questions and I'll cede the floor. Can you just speak to what you're hearing from your rail customers in terms of train speed? How that could influence the need for additional cars going forward?

Train speeds have come off some, but they've actually shown some improvement here in the last few weeks. So, clearly increased volume in the system traditionally has resulted in lower train speeds and obviously a greater need for cars. But it's been fairly stable here over the last several weeks.

Yes. If you look at it from where they peak at their efficiency, they're down a couple miles an hour, about 10%. And as Ed said, as more cars get online, typically that will slow them down which will increase the demand for railcars.

Two other quick ones, just utility coal inventories, are you hearing from your customers that that's a potential driver of additional demand at some point as well?

Inventories are pretty much at five year averages right now. So, I think that's sort of a neutral factor right now.

So just hopefully winter weather continues draw down inventories and then that might turn into a more positive dynamic?

Right. Right. I think the good news is the inventories are back down to the five year averages from where they were. So, again it's -- that's a factor that's moving in the right direction for us.

Okay. Last question for me and I'll hop off. Any growing interest that you're seeing from prospective buyers of your lease car fleet?

We're always interested in doing that and we're trying to maximize the value of that fleet. So, it's an asset value maximization situation. We're always trying to do that.

You think we're getting closer to some type of transaction than we were maybe six months ago?

Pardon me?

Are we closer to a transaction than we were say six months ago?

Again, these are individual leased opportunities and we're always looking at trying to monetize them. But I don't have any further comment on that right now.

Yes. We'd like to see you do that. But thank you for answering the questions.

Thanks, Brad.

Our next question is from Kristine Kubacki with Avondale Partners. Please go ahead.

Morning.

Good morning, Kristine.

I was just wondering, a little bit more on a storage -- not to beat a dead horse, but just wondering, you talked about it's coming out -- cars are coming out at a slower pace. Is that typically the kind of -- the pattern you see this time of year?Or would you expect them to be dipping down as we're in the heavy winter months?Or is this something we expect to resume as we go into the spring months? And then, do you have a sense for what the normal storage number is for coal cars?

I think what we're seeing is what we would normally expect to see. There isn't a lot of seasonality into it as we get into the summer and there's going to be more burn for air conditioning and things like that. There could be further draws on the stockpile and more cars. It's a function of -- it's a function of the train speeds basically and growth in coal loadings and production that's really going to cause that to happen. So, I think we're going to continue to see a gradual reduction in that number.

What do you think is the base level for cars in storage?

Probably I would say we're getting down close to it right now. There's about 290,000 or so coal cars in the system. That's -- we're down to about just a few percentage points. So, it's pretty -- it's getting pretty well down to a low point, I would say.

Okay. And then a question on the repair and services side a little bit, are you seeing any customers push out the duration between maintenance intervals?Or are customers back to their average time in terms of repairing their cars and doing normal maintenance intervals on their cars?

The types of cars that we see, the customers are very concerned about making sure that their preventive maintenance is being done. And we are not seeing -- we did not see and are not seeing any attempt to slow down maintenance cycles.

Okay, very good, very helpful. Thank you very much.

You're welcome.

Next question is from Gary Lenhoff with Wintrust Capital. Please go ahead.

Thanks and good morning. Can you tell us what was railcar service revenue in the quarter?

About -- we don't give out that detailed information on any of our product offerings.

Okay. Can you tell us how much DTE added in the quarter?

No. We don't discuss the contribution of individual elements in the business.

Okay. Thanks.

You're welcome.

Your next question is from Michael Gallo with [CLK]. Please go ahead.

Hi. I just had a follow-up question. The 2,000 cars you had in backlog at the end of the year, when would you expect those to ship? Would you expect those all to ship in the first half?Or just some more clarity on that would be helpful. Thank you.

I think on our last call we indicated that we thought that those cars would be shipped over 2010 and roughly the first half of 2011 and that's still the case.

Okay, great. And then just a follow-up question, on the SG&A line you've taken a lot of G&A out over the last couple years. I was wondering as you go through the up cycle, when it does really start in earnest, do you think a lot of that G&A will come back?Or you think you'll be able to -- have pruned some of those costs or done things more efficiently and taken some of those costs out for good? Thank you.

I think that while there certainly will be a small amount of increase, we believe that we can pretty well run the Company with the G&A levels we're experiencing today with very modest increases.

So, pretty much other than the selling portion, the core G&A, you think you can hold relatively constant even as you move back up. Is that what I'm hearing?

Yes. That's certainly our intent.

All right. Okay. Thank you.

Next question is from Brad Evans with the Heartland. Please go ahead.

Okay, I'm back for a couple more. Hello, Ed, I'm just curious if -- just when you're talking to your customers on their new orders of cars, do you sense that, and I appreciate the fact that you said the cars that are still in storage are mostly aluminum, but with steel prices where they are today, do you sense that perhaps the rails might be inclined to accelerate the scrappage of old steel cars in the fleet and then replace them with new aluminum?

I think certainly if the cars are to the stage where they require scrapping, the current scrap prices are encouraging them to do that and that is taking place. I think we're going to have a very high level of railcar scrappage that we had in 2010 and that will continue in 2011.

I guess you just marry that with the bonus depreciation. It just seems like a perfect, virtuous cycle for you in terms of reasons to scrap and incentives to buy new. I don't understand why -- would you be disappointed if you didn't see orders in 2011 at levels that were perhaps greater than 2008? I'm not asking you to forecast. What does your gut say? Would you be disappointed if you weren't able to get to that type of level?

I guess I don't have a comment on that. I really -- I just don't have a comment on that.

Is it possible?

I have no idea.

The pipeline that you're looking at today, how does the pipeline -- can you quantify the pipeline of opportunity that you're looking at today versus, say, six months ago?

As I mentioned earlier, we're seeing somewhat of an increase in the level of inquiries but not a great level versus the third quarter in coal and again, they're very lumpy. The inquiries are very lumpy and you can't ascribe a trend to the process.

Okay. And I'm just curious, how do you think the Board is thinking about restoring the dividend? Do you think if the Company were to return to profitability, would a dividend reinstatement be not far behind?

As we had mentioned, we believe the dividends should be paid out of operating earnings and when that time comes, we will reconsider the dividend.

Okay, thanks.

Thank you very much.

(Operator Instructions)There are no further questions at this time. Please continue.

Okay. That will end our conference call today. Thank you, everybody, for participating. And again, if you have any questions, feel free to give Ed and I a call. And again everything you can -- the 8-K is out on our website at www.freightcaramerica.com. Thank you.

Thank you. Have a good day.

Ladies and gentlemen, that does conclude your conference for today. There will be replay available from February 17 at 1 PM Eastern Time until March 17, 11.59 PM Eastern Time. Dial in number is 800-475-6701 with an access code of 190785. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.