FreightCar America Inc (RAIL) 2011 Q1 法說會逐字稿

Welcome to FreightCar America's First Quarter 2011 Earnings Conference Call and Webcast. (Operator instructions) An audio replay of the conference call will be available from 1.00 p.m. Eastern Daylight Time today until 11.59 p.m. Eastern Daylight Time on June 5, 2011. To access the replay, please dial 1 (800) 475-6701. The replay passcode is 201921. 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 call over to Joe McNeely, Chief Financial Officer of FreightCar America.

Thank you, and welcome to FreightCar America's First Quarter 2011 Earnings Conference Call and Webcast. Joining me today are Ed Whalen, President and CEO of FreightCar America, and Ted Baun, Senior Vice President, Marketing and Sales. Ed will begin by providing you an update on the Company and the current market in which we are operating. I will briefly review the consolidated results for the first quarter and the financial results for each of our segments. Lastly, we will open up the call to your questions.

Before we begin, we'd like to remind everyone that statements made during this conference call related 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. Participants are directed to FreightCar America's 2010 Form 10-K for a description of certain business risks, some of which may be outside the control of the Company, that may cause actual results to materially differ from those expressed in the forward-looking statements. 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 2010 Form 10-K and earnings release for the first quarter of 2011 are 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.

Thanks, Joe, and good morning. We would like to welcome you to FreightCar America's First Quarter 2011 Earnings Call. Beginning this quarter, we are reporting our financial results in two segments -- manufacturing, and services. While Joe will address our consolidated financial and segment operating results in more detail later in the call, I am going to discuss the Company's overall performance as well as address what we are seeing in the marketplace.

Our consolidated financial results and order activity for the first quarter of 2011 reflect modest improvements in the coal car market. Sales revenues in the first quarter were $72.2 million with a net loss of $1.3 million. Sales in the fourth quarter of 2010 were $51 million, resulting in a net loss of $3.5 million.

There were 4,027 rail cars ordered in the first quarter of 2011, compared to 331 rail cars ordered in the fourth quarter of 2010 and 3,656 rail cars ordered in the first quarter of 2010. We delivered 875 rail cars in the first quarter of 2011, 858 of which were newly-built. This compares to 694 new rail cars delivered in the fourth quarter of 2010, and 321 new, leased and used cars delivered in the first quarter of 2010.

Our backlog at March 31, 2011 was 5,206 rail cars, compared to 2,054 rail cars at December 31, 2010. The backlog of unfulfilled orders at March 31, 2010 was 3,600 rail cars. With increase in the industry-wide railcar order activities since 2010, industry-wide material and component availability has tightened. However, we are well-positioned to be able to deliver our current backlog in line with customer expectations.

In general, we feel market indicators continue to trend in a positive direction. For example, North American commodity loadings for the first quarter of 2011 continued their positive trend over the prior year, particularly in the chemicals and motor vehicles and equipment product categories. Loadings for all commodities in the first quarter were roughly 4% higher than the first quarter of 2010. Coal loadings also continued to trend higher with first quarter 2011 loadings roughly 4% higher than first quarter 2010.

From a coal demand standpoint, US electricity generation through the first two months of 2011 was essentially flat compared with the same period in 2010. Coal stockpiles have also continued their downward trend relative to recent historical levels, with February 2011 figures some 6% below last year's level.

Coal exports have remained strong, increasing 49% through the first two months of 2011, when compared to the same period in 2010.

Rail transit times have continued to slow in the first quarter, and the number of coal cars in storage appears to have further declined from about 8,000 rail cars at the end of the fourth quarter of 2010 to approximately 7,000 rail cars at the end of the first quarter of 2011. Overall, we are encouraged by the direction of these market indicators, and are cautiously optimistic that these trends will lead to gradual improvement in the demand for new coal cars.

With respect to our services segment, the integration of FreightCar Rail Service is progressing as planned, and the business is performing as anticipated. During the first quarter of 2011, our services segment benefited from strong throughput attributable to providing repair and maintenance services along with parts sales for rail cars coming out of storage.

Our backlog for the services segment is strong, and we believe that demand for repair and maintenance services will remain robust in the near term.

As we had stated on previous calls, we will continue to seek ways to capitalize on the growth in this market by looking for opportunities to expand our capabilities in the service, repair and maintenance, and parts business. However, as we have consistently stated, we remain prudent in our approach to grow through acquisitions.

We continue to believe that coal will remain a critical element of our national long-term energy supply. This view is strengthened by the uncertainties surrounding the future of nuclear power generation in the US and in other developed countries, in light of the recent nuclear crisis in Japan. 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.

While market conditions for coal cars and our backlog are showing improvement, we believe that competitive conditions will continue to pressure margins in the near term. As a result, we will continue to focus on optimizing performance, strictly controlling all costs throughout our organization, and maintaining our strong balance sheet.

Now, I would like to turn the call over to Joe McNeely, to address our first quarter results in more detail.

Thank you, Ed. As Ed mentioned, we incurred a net loss of $1.3 million in the first quarter of 2011, or a loss of $0.11 per share. This compares to a loss of $3.5 million, or $0.29 per share, in the fourth quarter of last year, and a loss of $3.3 million or $0.28 per share in the first quarter of 2010. Consolidated revenues were $72.2 million in the first quarter of 2011, which were $21.2 million higher than the fourth quarter of last year, and $52.7 million higher than the first quarter of last year.

Our manufacturing segment, which includes new rail car manufacturing, used car sales, leasing and major rail car rebuilds, delivered 875 new and used rail cars in the first quarter of 2011. We delivered 694 new rail cars in the fourth quarter of 2010 and 321 new, used and lease rail cars in the first quarter of 2010.

Manufacturing segment revenues for the first quarter of 2011 were $63.1 million compared to $45 million in the fourth quarter of 2010, and $15.3 million in the first quarter of 2010. This increase in revenues reflects the increase in the number of rail cars delivered and also favorable mix of new versus used cars as compared to the first quarter of last year.

Operating income in the manufacturing segment was $0.2 million in the first quarter of 2011. Operating income for segment reporting purposes includes segment revenues, associated cost of sales, and cost to support current operations. Operating income for the fourth quarter of 2010 was a loss of $1.4 million, and operating income for the first quarter of 2010 was a loss of $2.7 million.

Operating income continued to be negatively impacted by low production rates and competitive pricing pressures, but has increased from prior periods due to the increase in rail cars delivered, improved utilization of our manufacturing facilities, and continued cost controls. Despite the recent increase in our orders and in our backlog, we expect new railcar pricing for our car types will remain very competitive, keeping pressure on operating income until demand improves.

Our services segment includes rail cars repairs and maintenance, inspections, parts sales, and rail car fleet management services. Services segment revenues for the first quarter of 2011 were $9.1 million, which were $3.1 million higher than the fourth quarter of last year, and $4.9 million higher than the first quarter of last year. The increase from the fourth quarter of 2010 reflects an inclusion of FreightCar Rail Services for a full quarter and higher parts sales.

As you may recall, FCRS business was acquired on November 1, 2010. The increase in revenues from the first quarter of 2010 reflects the addition of FCRS offset by lower parts sales.

Operating income for the services segment was $1.1 million for the first quarter of 2011 which compares to $1 million for the fourth quarter of 2010. The full quarter impact of FCRS and higher parts sales in the first quarter of 2011 were partially offset by unfavorable material cost increases and sales mix differences.

Operating income in the first quarter of 2010 was $2 million, which reflects higher parts sales in that quarter. Corporate costs for the first quarter of 2011 were $5.1 million, which were $1.1 million lower than the fourth quarter of 2010 and flat at the same quarter last year.

The favorable results versus the fourth quarter 2010 reflect lower consulting, legal and personnel costs. Our effective cash rate for the first quarter of 2011 was 66.7% compared to 43.4% for the fourth quarter 2010. At low levels of income or loss, our tax deductible could well significantly impact the effective tax rate. In addition, the effective tax rate in the first quarter of 2010 was also impacted by increases in state income taxes in certain states we operate in.

Our financial position continues to be strong with no debt outstanding and cash on hand of $52.9 million at the end of March 2011, which is down $64.1 million from the end of last year.

Total working capital excluding cash increased $14.3 million from the end of 2010. The increase in working capital includes an increase in accounts receivable of $9.9 million, which primarily reflects billings for delivered rail cars. In addition, inventories increased $9.7 million, $5.9 million of which reflects finished rail cars to be delivered. We continue to have no current plans to draw upon our revolving credit facility.

Lastly, the value of rail cars under lease at year end was unchanged from the prior quarter at $65 million. Activity in the secondary market for rail cars has recently increased, which may provide remarketing opportunities for certain of our leased rail cars later this year.

That ends the prepared comments, and we are now ready to address your questions.

Thank you. (Operator instructions) Our first question is from the line of Michael Gallo with CL King. Please go ahead.

Hi, good morning. My question is, FreightCar America, my recollection before the down cycle started, had come up with a number of new car type designs besides coal including double-stack intermodal and some other cars. I was wondering, as that market begins to tighten up, some of the competitors there begin to fill up their capacity and their slots, I was wondering if the non-coal car area is an area you're actively pursuing, or should we continue to expect that coal is going to continue to be the driver in terms of car types, near term? Thanks.

Well, we are continuing to pursue those areas that you described with new products, and quite actively. However, coal will continue to be certainly the largest component of our sales going forward here in the immediate future.

I was just wondering if there's any signs you're getting traction on any of the other car types?

We have had some success with some of the other car types, although I would characterize it as modest right now.

Okay. Is that something that you think you would expect to have more success as some of the order books begin to fill up? Or, is it an issue of price or functionality, or just habits in buying from certain customers? Help me understand kind of why you think you haven't been as successful in those areas?

Well, I think it's a function of the demand in those various market segments, and some of those have gotten stronger right now. It's a function of the particular design of the car that we have available, a number of things like that. But I would expect that as we move into later this year and early 2012, that we should have some further success in some of those markets.

All right, great. Thank you. Any commentary, Ed, on order trends to date in the second quarter? Obviously it was a nice uptick in the first quarter. Can we expect to see strong order demand, or are things sort of spotty still, where you book an order and then nothing kind of happens for a little while?

I would say, in general, that the inquiry level has improved. However, our transactions as I've said in the past are very need or transactionally oriented, and tend to be rather large. So, you cannot assume that a trend has been established here in the demand for coal cars. It's very transactionally-oriented, but I would say that there's a positive bent to that.

Right. Okay, great. Second question I have is, just on the lease fleet, my recollection when this was put on several years ago, it was more to compete with lack of some financing alternatives available in the marketplace at the time, and not necessarily a portfolio that you planned to hold long term for yield. So, my question is, as you look at the lease fleet today with lease rates ticking up, is that something that we should expect to see the company look to monetize, in the near to intermediate term? Or, is that something you think will continue to remain relatively flat as it has for the last several quarters?

I think as we pointed out in our prepared remarks, and as we mentioned in the past, this is really a tactical effort on our part to allow us to build rail cars, and our intention is not to build a large lease fleet. So, I would expect with the improvement in the markets that as we move further on into this year, there may be some opportunities to monetize some of those assets and we are looking at that all the time.

Okay, great. Thanks very much.

Our next question from the line of Brad Delco with Stephens, please go ahead.

Good morning gentlemen, how are you?

Morning, Brad.

Morning, Brad.

To follow up on the, I guess the encouraging sign that inquiries are still trending positively, Ed, maybe is there any way for you to put some color around where you're seeing a stronger level of inquiries? Is it from the lease side, or is this from some of your rail customers? And how might that be different than previous cycles, and what's the norm?

I guess there is no norm, but I think our inquiries, particularly in the coal area, have primarily been from end users rather than leasing companies at this point in time, and I don't think that we have seen any change in that trend over the past three months.

Gotcha. Would you expect, just based on the bonus depreciation, that there's probably more demand from the end user, just given the tax benefits? Is that kind of the way to think about it here?

I think while that's certainly a very attractive element, in our particular case I don't believe that a significant amount of the demand we're seeing right now is bonus depreciation driven. It's more driven by an actual need for the physical asset.

Gotcha. I think last quarter, too, you commented on I guess the high scrappage rates back in 2010, and you expected that to continue this year. Do you have any additional color you can provide on how that's been trending thus far?

The scrappage rate is still certainly at the high end of the range, and I think we expect that to continue this year given the level of the value of scrap steel at this point in time.

Gotcha. And then maybe this one's for Joe. I appreciate the additional details on the segments. I guess is there any additional detail you can give us on maybe what second quarter was like last year on the service side, so we can think about maybe what the trend is from what you were reporting for the first time in the first quarter of this year?

The second quarter of last year for the services is going to look relatively close to the first quarter, although I think revenues and operating are going to be down a little bit, just on some parts volume sales.

Gotcha. And then last question, appreciate the color on the improvement in overhead or corporate cost from call it third and fourth quarter of last year, to this first quarter. Is that a pretty good run rate for the year, or do you expect any sort of headwinds on the SG&A side?

We've kind of said in the past, we think we're at a good level on SG&A right now. Last quarter we had some legal costs, transaction-related. Part of that's FCRS and some other stuff that we don't anticipate repeating.

Gotcha. Well, I appreciate the time, guys. Keep up the good work.

Thank you.

Our next question from the line of Steve Barger with KeyBanc Capital Markets, please go ahead.

Hey, good morning. Can you talk about the economics of the orders you took in the quarter, and just generally what the pricing environment feels like in the first part of 2011 versus last year?

I guess all that we can say about that is that we've seen some modest improvement in margins, but there's still considerable pressure on margins at this point in time.

Okay. But is it fair to say that you expect to see better embedded margins in the backlog for the orders you're taking now, versus last year?

We would hope to see that, yes.

So, as you get into a backlog, in coming quarters that have better pricing, and you get past any abnormal cost issues related to the production ramp, how should we think about incremental margins in the back half of '11 or going into '12?

I would say I don't know. We generally don't comment specifically on margins, other than to say that we're gradually seeing them improve. I guess that's about all we can say about it right now.

Well, I'll try it this way. In the mid-2000 ramp, '04, '05, '06, your manufacturing operations ran low-20% incrementals. Is there any reason to think that as volume ramps up, in incoming quarters, you can't match that or at least get close to it?

Joe?

This is Joe. Again, the business is a bit different, our plants' structure is a little different, and the orders are different. So, we really can't comment on that.

Okay, and then one last one, and I'll get back in line. Are you seeing any supply chain constraints? Are you buying ahead on anything, whether it's steel or castings, or any other components?

As we mentioned in our prepared remarks, the market, the supply of componentry has tightened over the last probably particularly in the last three months, but over the last six months. But, we feel that we are positioned to produce the backlog in line with our promises to our customers at this point in time, but it's an area that we're monitoring very carefully.

Got it. Okay, thank you.

(Operator instructions) Our next question from the line of Paul Bodnar with Longbow, please go ahead.

Good morning, guys.

Morning, Paul.

Good morning.

Could you give a little more detail, maybe I missed this, just on the pace of some of these deliveries in the backlog?

Details on the units delivered?

No, just no, the pace of deliveries and what you have in the backlog here.

About all we can say about that is that we're producing the backlog in line with our customers' requirements.

Okay. There isn't any chance here you think that some of these railroads or some of these guys that have already kind of announced their CapEx plans go back to their boards, or come back around towards the end of the year and because of bonus depreciation come into the market a little bit larger? Or, is that not really something they typically do?

I think as I mentioned earlier, that may be the case with some companies, but from what I can gather in our particular case, it appears that the orders are taking place because of the need for the cars more so than the bonus depreciation, although certainly the bonus depreciation is a significant benefit to those people.

So you don't think that they would come back and look at the back half, and say, -- Hey, these guys have some capacity, let's get this done? Done now and we'll play some additional cars?

I guess it's possible, but I haven't seen any indication of that right now.

Okay. Well hey, thanks a lot.

(Operator instructions) We go to Michael Gallo with CL King, please go ahead.

Just a follow-up question on the service business. Obviously you're starting to see the contribution from the acquisition. I was wondering, as we go through the cycle, what kind of growth we should expect to see in that business? Certainly you have the largest installed fleet of coal cars out there. That would suggest there's a meaningful opportunity to expand that parts and services business. Can you talk a little bit about the opportunity there and how you see that ramping? Thank you.

I think that business is operating at a fairly high level right now, and it was operating at a fairly high level when we purchased it in November. We're continuing to look at ways to improve that business by improving its efficiency, as well as looking at things we can do to the layout of the operation to improve the efficiency, but that's going to take some time. So, I don't think you should expect to see any type of dramatic improvement in the top line from that business over the next six months or so.

So we should expect kind of a relatively similar level to what we saw in the first quarter, is that --?

I think that's fair to say, yes.

Right, okay. Thank you.

You're welcome.

And I'll turn it back to our speakers at this time.

Thank you. This concludes today's conference call. Thank you for joining, and a replay of this call will be available beginning at 1.00 p.m. today at (800) [475-6701], passcode 201921. Good day.

Thank you.

Thank you ladies and gentlemen, this ends your conference call. You may disconnect.