FreightCar America Inc (RAIL) 2011 Q3 法說會逐字稿

Welcome to FreightCar America's third quarter 2011 earnings conference call and webcast. At this time, all participant lines are in 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 is being recorded. An audio replay of the conference call will be available from one p.m. Eastern Daylight Time today until midnight Eastern Standard Time on December the 1st, 2011. To access the replay, please dial 800-288-8961. The replay passcode is 221441. 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 a FreightCar America.

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

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

Before we begin, I'd like to remind everyone that statements made during this conference call are relating to the company's expected future performance, future business prospects, or future 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 these certain business risks, some of which may be outside of 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 third quarter of 2011 are 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. And welcome to FreightCar America's third quarter 2011 earnings call. Before we begin, I would like to take this opportunity to introduce Terry Heidkamp, our Senior Vice President Operations. With 30-plus years of diverse rail industry operating experience, Terry brings a wealth of knowledge to our leadership team. Terry will oversee our manufacturing and service operations, focusing on optimizing performance. He will play a significant role in shaping the strategic direction of the company going forward.

I am pleased to report that our business continues to improve and we've produced the fourth sequential quarterly increase in deliveries, revenues, and operating income. Importantly, with the improvement in market conditions, coupled with our strict cost management, we achieved positive operating income for the first time since third quarter of 2009.

Our results reflect the continuation of the eastern coal car replacement process, strong class I and regional railroad performance, some improvement in coal demand, and continued strengthening in the railcar manufacturing sector.

The coal car market showed improved tone in the third quarter as inquiries were received from a broader base of customers, including railroads, financial institutions, and shippers, than were received in recent quarters. There were 2,840 railcars ordered in the third quarter of 2011, compared to 1,089 railcars ordered in the second quarter of 2011, and 17 cars ordered in the third quarter of 2010. We delivered 1,515 railcars in the third quarter of 2011, which compares to 1,309 railcars delivered in the second quarter of 2011, and 600 railcars in the third quarter of 2010.

Our backlog at September 30, 2011, was 6,311 railcars, compared to 4,986 railcars at June 30, 2011. Our backlog of unfulfilled orders at September 30, 2010, was 2,417 railcars.

Industry wide, there were 20,165 railcars ordered and 12,519 railcars delivered in the third quarter of 2011. Industry wide backlogs increased to 65,044 railcars at September 30, 2011.

Given the increased level of production across our industry, we continue to closely monitor and manage material and component availability. However, we are well-positioned to be able to deliver our current backlog inline with customer expectations.

The nation's railroads continue to produce strong results with many announcing record revenue and operating results in the third quarter of this year. North American commodity loadings for the third quarter of 2011, continued their positive trends, albeit at a slower pace than prior quarters. Overall, railcar commodity loadings for the third quarter of 2011, increased approximately 1% versus the same quarter last year, with metallic ores and metals and chemicals registering the strongest increases.

Intermodal loadings registered an increase of roughly 2% quarter-over-quarter. Coal loadings, however, decreased by 2.2% for the three months ended September 30, 2011, when compared to the same period last year. This decrease was driven in part by the impact of flooding in the Midwest coal traffic lanes. Despite such disruptions, coal car loadings for the month of September 2011, were up slightly from the same period last year.

From a coal demand standpoint, US electricity generation through the first nine months of 2011, has remained essentially flat when compared to the same period of 2010. Coal stockpiles have continued their downward trend relative recent historical levels, with August figures approximately 13% below last year's level, and were below the average for the last five years.

Given the combination of unusually warm summer temperatures and rail service disruptions due to the Midwest flooding, we expect coal stockpiles to remain significantly below 2010 levels and to continue to trend lower towards historical 10-year average levels in the near term.

Coal export activity has remained strong with coal exports through August 2011, up 32% when compared to the same period in 2010. For the full year 2011, coal exports are expected to reach approximately 100 million tons, a level not seen since the early 1990 s .

Rail transit times in the third quarter continued to be impacted by the Midwest flooding mentioned earlier, but started to show signs of rebounding in the closing weeks of the quarter. Industry wide, the number of railcars in storage has declined to roughly 260,000 as of September 30, 2011, a decrease of approximately 16,000 railcars when compared to the end of June 2011.

Similar to the national fleet, we estimate that the number of coal cars in storage continued their decline from about 6,000 railcars at the end of the second quarter 2011, to approximately 3,000 at the end of September 2011. This decrease resulted from cars being pulled from storage to aid in the replenishment of the utilities coal stockpiles and from slower rail transit times resulting from Midwest flooding.

In 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 expect that these trends will lead to sustained demand for new coal cars, however, our orders are likely to remain lumpy and somewhat difficult to predict.

During the third quarter of 2011, our service segment was impacted by the coal replenishment efforts. Utilities kept coal cars in service to replenish coal stockpiles, delaying scheduled maintenance shoppings. Our backlog for the services segment remains solid at all of our repair shops, and we believe the demand for railcar repair and maintenance services will continue to make a positive contribution to our results.

As we have consistently said, we continue to see way -- seek ways to capitalize on growth in the market by looking for opportunities to expand our capabilities in the railcar service business. However, we will remain prudent in our approach to growth through acquisitions.

As conditions continue to improve, we will manage to maximize overall income, execute our strategic priorities, and prudently grow each of our business segments while maintaining our financial strength and flexibility.

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

Thank you, Ed. Operating income was $1.8 million for the third quarter of 2011, versus an operating loss of $7.3 million for the same quarter last year and a loss of $1.9 million in the second quarter this year. The net loss for the third quarter of this year was $2.4 million, or $0.20 per share, which included a $4.2 million -- $2.4 million charge [to] tax expense as a result of intraperiod tax accounting. I will provide a little more detail on our tax expense in a moment.

The net loss for the third quarter of last year was $4.7 million, or $0.39 a share. Consolidated revenues were $130.1 million in the third quarter 2011, which were $32.5 million higher than the second quarter this year and $88.8 million higher than the third quarter of last year. The increases in revenue reflect the higher number of railcars delivered, in inclusion of the services business, and higher revenue per car.

Our manufacturing segments revenue for the third quarter of 2011, rose to $122.2 million compared to $88.3 million in the second quarter of 2011, and $39.3 million in the third quarter of 2010. These increases reflect higher railcar deliveries and increased revenue per car, which includes underlying material cost increases.

Operating income for the manufacturing segment was $6.9 million in the third quarter of this year, which was $4.8 million higher than the prior quarter and $8.7 million higher than the third quarter of last year. The increase in operating income reflects the increase in revenues, improved utilization of fixed manufacturing capacity, and the impact [of] cost management activities implemented in prior quarters.

Services segment revenues for the third quarter of 2011, were $7.9 million, or $1.4 million lower than the second quarter of this year, but $5.8 million higher than the third quarter of last year. Third quarter 2011 revenue was negatively impacted by delays in scheduled maintenance shopping as coal cars remained in service to replenish depleted coal stockpiles.

The increase in services revenue from last year reflects the inclusion of FreightCar rail services and higher parts sales. Despite the decrease in revenue, operating income for the services segment was $1.1 million in the third quarter of 2011. This was essentially unchanged from the prior quarter, as lower repair volume was mostly offset by sales mix benefits on part sales.

Operating income in the third quarter of 2010 was $0.5 million, primarily reflecting part sales.

Corporate costs for the third quarter of 2011, were $6.2 million. These costs were up $1.0 million from the second quarter of 2011, due primarily to compensation and other costs incurred in the quarter. Corporate costs for the third quarter of last year were $6.0 million.

As noted earlier, the effective tax rate for the third quarter of 2011, of 239% reflects the application of intraperiod tax accounting and is not representative of the full-year effective tax rate. The year-to-date effective tax rate of 12.3% reflects our full-year forecasted effective tax rate. This rate differs from the statutory tax rate due to the deduction goodwill amortization for tax purposes, the impact from changes in certain state's statutory tax rates on deferred tax balances and other differences.

These additional deductions increase the effective tax rate from the statutory rate in periods of loss and decrease the effective tax rate from the statutory rate in periods of income. At low levels of earnings or loss this impact is magnified, and slight changes in forecasted full-year consolidated results can have a significant impact on the company's effective tax rates.

The value of railcars under lease was $57.2 million as of September 30, 2011, which was down $8.6 million from the end of June 2011, due primarily to sale of railcars on lease. Interest in the secondary market for railcars and leases remain strong, and we continue to look for potential [re-marketing] opportunities for certain of our leased railcars.

Lastly, our financial position continued to be strong with no outstanding debt and cash on hand at the end of September 2011, of $66.8 million, up $13.6 million from June of this year. Working capital, excluding cash, decreased $8.5 million from the end of the second quarter this year, as the decrease in receivables was partially offset by increase in inventories and the application of customer deposits to billings in the third quarter of this year. We have no current plans to draw upon our revolving credit facility.

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

(Operator Instructions) We have a question from the line of Michael Gallo with CL King. Please go ahead.

Hi. Good morning.

Hi, Mike.

Congratulations on the improvement in results.

Thanks, Michael. Good morning.

Good morning. Just wanted to delve in a little bit on the inquiries as well as the new intermodal car that you have out there. I was wondering on the inquiries, if it's still primarily just on the coal side of the business or are some of your competitors starting to sell out their intermodal or other capacity types for next year and whether there might be an opportunity for you to sell some other car types into the market. Thank you.

You're welcome. Our inquiries are pretty broadly based across a wide variety of car tops -- types and not just limited to coal cars. With respect to the intermodal car, we displayed the car at the RSI show in Minneapolis last month. We've got some fairly good comments on that. And we are in the process of testing and obtaining regulatory approval to manufacture the car at this point.

Approximately how long do you expect that process will take?

It will take several more months, at least, to obtain regulatory approval.

Okay. Great. Thank you.

You're welcome.

Our next question comes from Justin Long with Stephens. Please go ahead.

Good morning. Thanks for taking my call.

Morning.

So I know you guys started production at your Roanoke facility this quarter. Could you talk about some of the startup costs that might be associated with that, that you either faced in the third quarter and is this something that might impact you in the fourth quarter as well?

Well, Roanoke has actually been up and running all year. Last year it was shut down. This year it had been started -- it actually started up in the first quarter of this year.

There continues to be some increase in hiring as we, again, put more production through there. So there's not a significant startup cost running through this third quarter.

Got you. And maybe that's where I had seen the press release you guys put out about the Norfolk cars going into production there. I think it mentioned that you took your headcount up a little bit. Do you have your headcount number as of the end of the third quarter and kind of what that compared to at the end of the second quarter?

I do not have that readily available, Justin.

Okay. On the service segment, quick question there. I know you guys mentioned that that was somewhat impacted by trains that continued to run to make up for some of the delayed coal volumes from flooding. Do you think that's going to result in a more favorable impact in the fourth quarter as some of those trains might become sidelined for additional maintenance work that was postponed?

Yes, I think we're already seeing, as some of these delays have been resolved by the railroads, these trains coming back for their periodic servicing. So I think there should be an increased flow of these trains through the shop in the fourth quarter.

All right. Thanks. That's helpful. Just one last question. How many leased railcars did you actually sell in the quarter? And could you maybe give the number for how many are left on the balance sheet as of now?

There's approximately 1,000 left on the balance sheet. There was a little over 100 sold during the quarter.

Okay. Great. Thanks for the time. I appreciate it.

You're welcome.

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

Hi. Good morning. It's actually Elliott Waller for Peter. How are you?

Morning.

Morning, Elliott.

Congratulations on the quarter.

Thank you.

Couple questions. Implied ASPs, average selling prices on the railcars are up. But how much of that is from the service mix growing? And then, if you could give us a sense of, on an apples-to-apples basis what average selling prices are doing. Thank you.

In terms of the specifics in the service's side, you can see that in the earnings release. The revenue for the quarter from the services was $7.9 million. The manufacturing revenue was $122.2 million dollars. So that's -- using those numbers, you can look at what's happening quarter-to-quarter. And again, manufacturing revenues are up from $39 million in 2010 and $88 million in the second quarter.

Right. And in terms of the average selling prices, how have they trended, I guess the second quarter [through] the third quarter?

I'd say that while we generally don't give guidance on pricing, I'd say that pricing has continued to improve quarter-over-quarter.

Okay.

And I think it's also fair to say that some of that average selling price, you have to keep in mind is material-related --

Yes. As you mentioned, right.

-- go up, and that includes some of the material costs.

Okay. Is there any way to quantify from the first quarter of this year until now, what the pricing change has been? Is it 5%? Six -- 7%? Is that a reasonable way to think about it or how should we think about that?

Elliott, that's pretty difficult, mainly from a couple things. A lot of it has to do with product mix, different car types. There's not a good apples-to-apples comparison. A more high volume business can do some benchmarking to get specific price increase metrics.

Got you.

I think as we said, we've seen a continual improvement in the margins as we've gone along, commensurate with the improvement in backlogs --

Right.

-- but hard to quantify.

Okay. That's fair. And one final question. I know last quarter you mentioned on the call that you did not have any issues and supply constraints, and you mentioned on this call that [you are] continuing to be well supplied for the production needs.

Some of your competitors have talked about some supply chain constraints. Any way you can talk to the industry level where you are on supply?

I guess there really isn't too much more to say about it. We continue to manage that very carefully, and obviously we're concerned about it. But we feel, given the backlog we have right now, that we're well positioned to deliver those cars in accordance with our customers' expectations.

Okay. Great. Well, thank you again, and congratulations.

Thank you.

Thank you.

We have a question from the line of Sal Vitale, with Sterne, Agee. Please go ahead.

Good morning, gentleman. Good quarter. Just a quick question. I guess the RSI and their reported numbers for the third quarter in terms of, say orders and deliveries, they don't provide a specific number for coal car orders and deliveries. What is your sense that the coal car deliveries were -- orders and deliveries were during the quarter?

Well, if you look at their data, you can get a fairly good idea there by taking the open top hoppers and the GT gondola cars and adding them together. So somewhere in the 2,800 range.

Okay. That's about what I'm getting, 2,840. That sounds right. Okay.

Yes. Right.

Okay. So then based on that, it seems that your orders were pretty much all the coal car orders for the quarter.

We had a substantial market share this quarter, yes.

Yes. So then I'm getting -- I'd like to -- you're saying that you're seeing, in terms of inquiries, you're seeing it pretty broad based across all the different car types?

Yes, that's correct.

Okay. What is your sense, I understand that for the new intermodal car, it sounds like -- and correct me if I'm wrong, it sounds like you probably won't get new orders, any orders for that until, say 1Q, 2Q, at this point, or maybe a little longer than that?

Certainly, it definitely will be next year sometime, that's correct.

Okay. So then in the interim, do you expect to participate in other order types in the next, say in 4Q and into 1Q?

Sure. I think, as we've stated before, we regularly participate in other bulk commodities car types. We're capable of manufacturing aggregate cars and ore cars, some other things like that, that we regularly participate in.

Okay. And then if I could just switch gears real quick. One of the figures that I -- one of the metrics that I look at is your gross profit per railcar, I guess. And I'm calculating that to be about, I guess if you exclude the leased -- sale of leased cars, about $6,000 for the quarter, which is up pretty significantly quarter-on-quarter versus $3,000 last quarter. I guess what I'm trying to get a sense for is where do you think that will peak out at during the cycle? I mean, I expect that you are -- you're going to see continued improvements in that metric. How high do you think that number can get?

I'd say that's very difficult to project at this point in time. It's very hard.

Okay. But do -- you do expect to see continued sustained improvement in that metric?

Well, we still -- we -- I think we've demonstrated now four consecutive quarters of improving statistics, and we would expect that to continue for some time [here].

Right. I guess if I ask the question a different way, was there anything specific to the quarter that helped that number in terms of whether its capacity utilization or pricing on what was delivered during the quarter that happened to be higher than what you received in subsequent quarters?

I don't think anything -- there was anything out of the ordinary in the quarter, just normal continuation of existing trends.

Yes. And Sal, as we've talked in the past, our orders and revenue do vary quarter-to-quarter depending on which car types get delivered. So mix does have an input -- an impact on both revenues and margins in any one quarter. But there was nothing unusual in this quarter.

Okay. And then just speaking about the lumpiness, if I look at the orders you received back in 1Q, it was about 4,000, then that went down to 1,100 in 2Q, now up to 2.8 in 3Q. I know it's hard to predict. But are -- is there anything seasonal in terms of coal car orders that makes a 1Q and 3Q higher than other quarters? I mean, how do we think about that seasonally?

Sal, this is Ted Baun. There really is no trend from a seasonality standpoint. They are truly lumpy and there are many factors that play. So there's really no clear-cut answer I can give you in that regard.

Okay. That's helpful. Thank you very much. If I could just ask one last question on the service side. I think you said that that was impacted a little bit by the fact that railcars were kept in service to handle the flooding. So do you expect at this point that you'll start to see -- and I think that's what you said earlier, you'll start to see cars come into the shop for service in the fourth quarter.

Yes, that's correct.

Okay. So then sequentially we should see some nice revenue improvement in the services business in 4Q; is that fair to say?

One would hope.

And, Sal, keep in mind, as we talked on the call last quarter, the services segment traditionally has been a pretty stable business kind of quarter-to-quarter in terms of revenue. So, again, if you look back at what's happened the last couple quarters, that'll give you an idea of what may happen with revenue, assuming [we] get back to kind of normal production volumes in the shop.

Okay. That's fair. And then just a last question, I think it's actually along the same lines as, you said that cars, coal cars in storage declined from 6,000 to 3,000 sequentially?

That's correct.

And is -- was that also impacted -- was that also the result of the need for additional cars to handle the weather issues?

It's our suspicion that some portion of that related to cars being removed from storage to help maintain the stockpiles.

Okay. Do you think that over short-term that some of those cars can go back into storage as the weather issues abate?

Well, as I mentioned, we had seen at the end of September, some improvement in coal movement. So it's hard to tell. I guess there's a possibility, but difficult to tell.

Okay. And just one last question. One of your competitors last week said that it's not their plan to focus on coal cars in this cycle at this point anyway, at this point of the cycle because they don't see a sustained -- sustainable demand in that car type. What is your view on that? I mean, you've talked about the replacement cycle and there's plenty of replacement demand. But do you also think there could be some growth that will drive coal car demand this cycle?

The main driver for coal car demand is replacement. It's largely a replacement business. The growth in coal has been down to -- flat to down. So it's essentially a replacement business. That being said, in my view, there is going to be a sustained demand for replacement purposes going forward here for a considerable period of time. And I think if you take a look at the industry forecasters who are forecasting coal car deliveries, they will bear out that statement.

Okay. So it sounds like it's your expectation that pricing will continue to improve for coal cars over the next couple of years?

I don't think I said that, did I?

I'm sorry. I was just deducing that based on what you said? Is it -- I guess if I ask it differently, is it a fair statement to assume that coal car pricing will increase over the next couple of years?

Well, I mean again, I think you have to look at the results over the past three quarters. And we would expect to see a continuation of the trend that we've experienced over the last several quarters.

Okay. Fair enough. Thank you, and good quarter.

Thank you, Sal.

Thank you.

(Operator Instructions) The next question then comes from the line of Matthew Dodson with Edmunds White partners.

Can you just talk a little bit about the incremental margins? So, obviously, your backlog is very strong. And it sounds like the pricing on the orders that you took was incrementally better and should continue to get incrementally better as everybody's getting more full. So can you help us understand the incremental margins of maybe how December, and as you go into '12, we should see?

Matthew, this is Joe. We don't give forward-looking guidance. I think the best thing we can say is kind of look at what's happened over the last few quarters in terms of our trends.

So 20% to 30% incrementals?

Say it again, Matthew.

Twenty to 30% incrementals is what we should look at?

Well, you're -- those are off a pretty low base where we had very low margins. I think if you look at where our margins are at versus long-term historical margins, they give you an idea of where they can move. Absent that, though, we're not -- we don't give specific guidance on pricing or margins.

The last question. Can you just talk a little bit about your availability as you get into '12, and how much -- will you deliver everything by '12, or are some of these orders for '13?

Our backlog is distributed over 2012, with some for delivery in 2013. We still have capacity to add production in 2012.

Thank you.

You're welcome.

And at this time, there are no other questions and queue.

Okay. Well, this concludes today's conference call. Thank you for joining. A replay of this call will be available beginning one p.m. Eastern Time today, at 1-800-288-8961, passcode 221441. Good day.

Thank you.