FreightCar America Inc (RAIL) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to FreightCar America's second quarter 2011 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 your questions at the end of today's prepared comments. Please note that this conference call is being recorded. An audio replay of the conference call will be available from 1 pm Eastern Daylight Time today until 11.59 pm Eastern Daylight Time on September 4, 2011. To access the repay please dial 1-800-475-6701. The replay access code is 211102. An audio replay of the call will be available on the Company's website within two days following this earnings call.

With that being said, I would like to now turn the call over to Mr. Joe McNeely, Chief Financial Officer of FreightCar America.

Thank you, and welcome to FreightCar America's second quarter 2011 earnings conference call and webcast. Joining me today are Ed Whalen, President and CEO, and Ted Baun, Senior Vice President, Marketing and Sales.

Ed will begin by providing you an update on the Company and the markets in which we're operating. I will briefly review the consolidated results for the second quarter and the financial results for each of our segments. Lastly we'll open up the call to your questions.

Before we begin, we'd 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. 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 second 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.

Thank you Joe. Good morning and welcome to FreightCar America's second quarter 2011 earnings call.

Our consolidated financial results and order activity for the second quarter of 2011 reflect modest improvement in the coal car market. Revenues in the second quarter were $97.6 million with net income of $0.2 million.

Sales in the first quarter of 2011 were $72.2 million, resulting in a net loss of $1.3 million. Net income for the second quarter of 2011 benefited from increased deliveries, the sale of certain leased railcars, and a change in our effective tax rate.

There were 1,089 railcars ordered in the second quarter of 2011compared to 4,027 railcars ordered in the first quarter of 2011 and 14,000 -- 14 cars ordered in the second quarter of 2010. We delivered 1309 railcars in the second quarter of 2011 which compares to 875 railcars delivered in the first quarter of 2011 and 614 railcars in the second quarter of 2010.

Our backlog at June 30, 2011 was 4,986 railcars compared to 5,206 railcars at March 31, 2011. The backlog of unfulfilled orders at June 30, 2010 was 3,000 railcars. With 16,900 additional railcars ordered industry-wide in the second quarter of 2011 we recognize the ongoing need to closely monitor and manage material and component availability. We are well positioned to be able to deliver our current backlog in line with customer expectations.

While we see mixed signals concerning the market recovery we continue to believe that the market for our railcars is trending in a positive direction. For example, North American commodity loadings for the second quarter of 2011 continued their positive trend, albeit at a slower pace than prior quarters. Overall railcar commodity loadings for the second quarter of 2011 increased 1.2% versus the same quarter last year with metallic ores and metals and chemicals registering the strongest increases.

Intermodal loadings registered an increase of roughly 6% quarter over quarter. Coal loadings for the second quarter of 2011 decreased by 2.4% when compared to the second quarter of 2010 as flooding in the Midwest and Canada disrupted rail operations. Despite this disruption, coal car loadings for June 2011 were up slightly from the same period last year.

From a coal demand standpoint, US electricity generation through the first six months of 2011 was essentially flat as compared with the same period in 2010. Coal stockpiles have continued their downward trend relative to recent historical levels, with April figures approximately 8% below last year's level and generally in line with the average for the last five years.

With the recent extreme hot temperatures increasing electric demand across much of the nation and rail service disruptions due to flooding, we expect coal stockpiles to further decline in the near term. Coal exports have continued their strong pace, increasing 41% through April of 2011 when compared to the same period in 2010.

Rail transit times continued to slow in the second quarter through the impact of flooding and increased volumes. Industry-wide, the number of railcars in storage has declined to roughly 276,000 as of June 30, 2011, a decrease of approximately about 7,400 railcars when compared to the end of March 2011. Similar to the national fleet, we estimate that the number of coal cars in storage continued their decline from about 7,000 railcars at the end of the first quarter of 2011 to approximately 6,000 at the end of June 2011.

On balance we are encouraged by the direction of these market indicators and when taking into account the need to replace aging steel-bodied railcars we are cautiously optimistic that these trends will lead to increased demand for new coal cars even though our orders are likely to remain lumpy and difficult to predict.

During the second quarter of 2011 our services segment benefited from strong through-put attributable to providing repair and maintenance services along with parts sales for railcars despite several weather-related interruptions.

Our backlog for the services segment is strong and we believe that demand for railcar repair and maintenance services will remain robust in the near term. As we have consistently stated, we continue to seek ways to capitalize on growth in the market by looking for opportunities to expand our capabilities in service, repair and maintenance along with the parts businesses. However we remain prudent in our approach to growth through acquisitions.

While the overall market environment is slowly improving we believe the competitive conditions in the coal market 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 while prudently growing the business.

Lastly, as disclosed yesterday, on August 1, 2011, we terminated our joint venture agreement with Titagarh Wagons Limited. While we are, of course, disappointed with this outcome, we continue to believe that there are significant potential opportunities for the Company to grow in businesses outside North America.

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

Thank you Ed. As Ed mentioned, net income was $0.2 million in the second quarter of 2011 or $0.02 per share. This compares to a loss of $1.3 million or $0.11 per share for both the second quarter of 2010 and the first quarter of this year.

Net income for the second quarter of 2011 included a gain from the sale of railcars on lease and a change in our effective tax rate, which I will address in a minute. Consolidated revenues were $97.6 million in the second quarter of 2011, which were $25.3 million higher than the first quarter of this year and $66.6 million higher than the same quarter last year.

Our manufacturing segment delivered 1,309 railcars in the second quarter of 2011 which included 90 railcars put on lease. We delivered 875 new and used railcars in the first quarter of 2011 and 614 new, used and leased railcars in the second quarter of 2010.

Manufacturing segment revenues for the second quarter of 2011 rose to $88.3 million compared to $63.2 million in the first quarter of 2011 and $26.4 million in the second quarter of 2010. These increases reflect the increase in the number of railcars delivered along with a favorable mix of new versus used railcars.

Operating income for the manufacturing segment was $2.1 million in the second quarter of 2011 which was $1.9 million higher than the first quarter of 2011 and $0.8 million higher than the second quarter of last year.

The increase in operating income from the first quarter of 2011 reflects the increase in new railcars sold, the sale of certain leased railcars along with improved utilization of fixed manufacturing capacity and continued prudent cost management activities.

The increase in operating income from the second quarter of 2010 reflects the sale of leased railcars. The increase in cars sold versus the second quarter of last year was offset by product mix differences. Despite the increase in our orders and backlog we expect new railcar pricing to remain competitive, keeping pressure on operating income in the near term.

Services segment revenues for the second quarter of 2011 were $9.3 million or $0.2 million higher than the first quarter of this year and $4.7 million higher than the second quarter of last year. The increase from the second quarter of 2010 reflects the inclusion of freightcar rail services partially offset by lower parts sales.

Operating income for the services segment was $1.2 million for the second quarter of 2011 which compares to $1.1 million in the first quarter of this year. Operating income in the second quarter of 2010 was $2.4 million, primarily reflecting strong parts sales.

Corporate costs for the second quarter of 2011 were $5.2 million, which are about the same as the first quarter of 2011, but $0.6 million lower than the same quarter last year. The decrease from last year reflects lower consulting and legal costs and our ongoing cost controls.

Our effective tax rate for the second quarter of 2011 was 109% compared to 67% for the first quarter of 2011. At low levels of income or loss, our tax deductible goodwill significantly impacts the effective tax rate and slight changes in forecasted annual taxable income can have a significant impact on our effective tax rate in any one quarter.

Our financial position continues to be strong with no outstanding debt and cash on hand of $53.3 million at the end of June which is up $0.4 million from March of this year. Working capital excluding cash decreased $1.9 million from the end of the first quarter. The increase in accounts receivable of $63.7 million to $77.8 million was more than offset by an increase of $15.1 million in customer deposits and other working capital changes.

The accounts receivable balance primarily reflects billings for recently delivered railcars with $72.6 million of the outstanding balance collected after quarter end.

We currently have no plans to draw upon our revolving credit facility.

Lastly, the value of railcars under lease was $65.8 million as of June 30, 2011 and $64.9 million as of March 31, 2011. Activity in the secondary market for railcars has improved with a number of transactions completed throughout the industry this year. During the second quarter we sold railcars on lease for a pre-tax gain of $1 million.

We continue to evaluate the secondary market and will look for potential re-marketing opportunities for certain of our leased railcars.

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

(Operator Instructions.) First in the line is Michael Gallo with C.L. King. Please go ahead.

Hi, good morning. A couple of questions. I guess just some fits and starts in the coal market this year and continues to be somewhat lumpy, but any signs that you're seeing inquiries pick up at all? It seems that some of the rails have talked about starting to replace their aging coal fleets over the next couple of years.

Yes, Michael. Good morning, this is Ted Baun. We are seeing inquiries pick up as the year progresses.

It's just, kind of, taking a little while to materialize in the orders, or would you expect that you'll start to see orders pick up in the back half from kind of, you know, a pretty low level, I guess you saw in the second quarter?

I think it's strengthening modestly from quarter to quarter, so, you know, we are hopeful that that will continue.

Okay, great. Second question I have is just on the lease rates, and the lease fleet. Obviously you turned over some fleet this quarter for a gain. Lease rates have been moving up. I know you'd indicated longer term that you didn't plan to keep those cars necessarily or hold them for yield, but help us with what we should expect to see on that leased fleet over the next couple of years. Should we expect to stay at this level for the foreseeable future? Would you expect you'll take advantage and turn over some further fleet, or just help us with how we should think about that? Thank you.

I think that --this is Ed --I don't think -- we certainly are looking opportunistically to sell lease transactions in an improving market, but I would not, I really wouldn't expect that totals to change very much over time.

All right, so just pretty much stay around this level, give or take?

I think it will be a churning process, but I don't think you should expect to see the size of the fleet change very much over time.

Okay, great, and then just final question, just in terms of the gross margins I saw a little bit of sequential improvement, again, still at an absolutely low level. Can you talk about the gross margins of what's in your backlog today versus what we saw in the second quarter? Do we continue to see improvement or should we expect to see generally around the same level?

I think we can expect to see some modest improvement, primarily a result of improving operating leverages we improve throughout the balance of the year here.

All right, great. Thanks very much.

Thank you.

Our next question is from Peter Nesvold of Jefferies. Please go ahead.

Hi, good morning. It's Elliot Waller in for Peter. How are you today?

Good morning, Elliot.

First question for you. Gross profit dollar per railcar came in, roughly, around $3,000. Year over year I think that was down almost 50% and peaked-out [in '07] at [13.8]. Why aren't we seeing more leverage at the gross profit per dollar railcar right now? We thought we'd start to see more there.

I think the reason we're seeing that is there's still a significant amount of pressure on market pricing and it's affecting the gross profit.

Got you, and is that mainly backlog as well as new orders?

Well, I think it's been -- we've been under consistent pressure here since the recovery began and we really have not seen significant -- we had seen some, but not what I would call significant pricing improvement since the recovery began.

Okay, in order of magnitude how far would you say prices are below pre-the great recession levels?

That's pretty difficult because of the increase in underlying material costs, to give that number. The absolute prices are not that far below but we've also had very significant material cost increases over that time frame, so --

Right. Got you. That makes sense. Okay, and can you talk a little bit about orders you've seen following the end of the quarter?

As Ted mentioned, we're seeing continuing activity but since we don't give guidance we can't comment on any orders or activity since the end of the quarter.

Okay, fair enough, and obviously -- two other quick housekeeping questions. SG&A as a percentage of revenue was about 7%. How should we think about that going forward?

As we said on prior calls we think our SG&A levels, in dollars, are where we need to be to handle the volume of business with some growth. It should not change much going forward, absent a little bit of -- a few positions to add here, but generally the level of SG&A spending shouldn't change all that much.

Okay, fair. Last one, tax rate, obviously there's a lot of volatility depending on profitability. How should we think about that going forward?

Again, it's going to be volatile given the impact of the tax deductible goodwill on -- when you have the low earnings that we have. You know, slight changes in the full year rate will change that rate in any one quarter as you true-up to the year-to-date rates. I think what you would look it is look at where the year-to-date effective tax rate is and that's our -- approximates where we think the full year effective tax rate's going to be.

Okay, very good. Thanks for the time.

Thank you.

Next, going to Sal Vitale with Sterne Agee. Please go ahead.

Good morning gentlemen, thanks for taking my call. I appreciate it.

Good morning, Sal.

The first question I have is, just looking at the, I guess, the ratio of orders to deliveries -- and I know it's probably not accurate to look at any simplistic measure like that. But you know, if I look at last quarter -- and I understand, also, it's because of the lumpiness of orders -- but, last quarter orders were about 4.6 times deliveries, whereas this quarter, in 2Q, they were about 83% of deliveries. So if I take that 1,000 orders divided by the railcar deliveries of 1,300, how do you we think about that going forward? Do you expect that to reverse again so that the orders will be higher than the deliveries in the third quarter and into the fourth quarter?

I think you have to remember in this industry that you cannot look at any individual quarter, order-wise, particularly in our segment, in the coal segment, because the orders tend to be very large and very lumpy. So I don't think you can make any generalization other than to say that, as Ted pointed out, we're seeing increasing activity in the coal market which should lead to improving orders over time.

Okay, and just to follow up on that, and I don't think it was in the press release that you issued, can you provide what percentage of your overall deliveries were coal car deliveries? I think that's something you provided in the past, at about 90% or so?

We normally don't comment, for competitive reasons, on specific percents, but the lion's share of it were coal cars.

Okay, and then just switching over to the margins. If I look at the gross margin improved in the -- sequentially in the second quarter. Some of your competitors that have reported have indicated that there were supply chain issues, you know, shortages of parts and castings that impacted their margin performance. In reading through your release I didn't see any mention of that. Any particular reason why you may have avoided that?

I think that we had just made arrangements for our materials well enough in advance so we had sufficient materials to produce our cars as they were scheduled in our backlog, and I think we mentioned that on the prior call.

Okay, and can you make any comment whatsoever on CSX's recent announcement of its increase in CapEx geared primarily towards new coal cars? I would assume, given your market share, that internally that you're thinking of a certain number of orders in the second half of this year. Can you give any color whatsoever on that, just to get a sense for, you know, what your backlog will be toward the end of the year as a result of any new coal car orders?

As I mentioned, we can't give you any guidance. I would suggest -- I would refer you back to CSX with that question. Maybe they can provide you a little more guidance than we can.

Okay, thank you for your time.

Thank you.

(Operator Instructions.) We'll go to Brad Delco with Stephens. Please go ahead.

Ed, I guess to get to -- it's the same question I think I've heard, but is it the right way to think about it, to think that you before you can start seeing margins expand, you're going to have to see backlog build first? Is that sort of the order of operations before you can go back to customers and say --we need to recover some of these material costs, and so you (inaudible - multiple speakers) --

I would think so, yes. Usually margins build as backlogs build.

Got you. So we need to see, you know, like you suggested, order inquiries are improving so that will impact backlog and margins will play out --

I agree with that.

-- kind of going forward from there?

Yes, I agree with that.

Then you did mention weather as an impact on the service side of the business. Is there any way to sort of quantify? Because you still did show some sequential improvement from first quarter. I'm just trying to piece together what the impact was from weather.

Brad, we don't disclose that level of details. It did disrupt operations for a few days in getting trains in and out but I think the comment there is that the group did a good job making up for that and still ended up with quarter-over-quarter improvements in revenue.

Got you. And maybe my last question, could you just update us on, kind of, where your production levels are, or available capacity is today versus where it was this time, or this quarter last year, just to try to make sense of -- you know you had deliveries that nearly doubled but roughly produced similar type of gross margins which would suggest you've obviously been adding capacity.

Remember, at this point last year, the Roanoke facility was essentially idle with cars being delivered out of our other facility, so it's hard to compare that and talk specific comparison by capacity.

You can't provide what your facilities that are running today, and the lines that are running today, what capacity's there versus with the one facility running last year, what it was last year?

In terms of available capacity or operating level?

Just what your -- what the business was set up for to run last year versus where it's set up to run this year in terms of, yes, available capacity.

Well, we -- I guess we have to go back and look at the comparative delivery levels. That's the only comparison that I think is really relevant. Right? I mean is --

Brad, I think what we've said on prior calls and even in some of our investor materials is that, you know, most facilities can produce the like types of cars in about the same volume. So with both facilities now in production, our total capacity has doubled from where we were this time last year. But actual capacity -- and it depends in big part on what types of railcars we have, what are the production runs, etc. So I -- that's a hard question to answer.

Okay. All right, guys, I appreciate the time.

Thank you.

To the presenters, no further questions. Thank you.

Okay, with that, that concludes today's conference call. Thank you for joining. A replay of this call will be available at 1:00 p.m. today at 800-475-6701, access code 211102. Good day.

Thanks everyone.