FreightCar America Inc (RAIL) 2011 Q4 法說會逐字稿

Welcome to the FreightCar America's fourth-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 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 1.00 PM Eastern Standard time today until midnight Eastern Daylight time on March 17, 2012. To access the replay, please dial 800-475-6701. The replay passcode is 236318. 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 fourth-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 are operating. I will briefly review the consolidated results for the fourth quarter of 2011, and the financial results for each of our segments. Lastly, we will open up the call to your questions.

Before we begin, I'd like to remind everyone that statements made during this conference call relating to the Company's expected future performance, future business prospects, or future events or 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 fourth 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 fourth-quarter 2011 earnings call. I am pleased to report that our business continued to improve, and we produced the fifth sequential quarterly increase in railcar deliveries, revenues, and operating income. Our fourth quarter results reflect improved railcar demand, partially offset by lower service volumes.

To recap order activity in the quarter, 4,481 railcars were ordered in the fourth quarter of 2011, compared to 2,840 railcars ordered in the third quarter of 2011, and 331 cars ordered in the fourth quarter of 2010. Fourth quarter orders include 3,300 rebuilt units. Revenue contribution from these cars will be lower than would be for the case for new cars, as many parts will be reutilized. We delivered 2,489 railcars in the fourth quarter of 2011, which compares to 1,515 railcars delivered in the third quarter of 2011, and 694 railcars in the fourth quarter of 2010. Our backlog of unfulfilled orders at December 31, 2011 was 8,303 railcars, compared to 6,311 railcars at September 30, 2011. Our backlog of unfulfilled billed orders at December 31, 2010 was 2,054 railcars. Industry-wide, there were 16,434 railcars ordered and 16,693 railcars delivered in the fourth quarter of 2011. As a result, industry-wide backlogs decreased to 64,575 railcars at the end of 2011.

For the year as a whole, the nation's railroads continued their strong performance, with many announcing record revenue and operating results. North American commodity loading exhibited positive year-over-year growth in each quarter of 2011, reflecting a pace of growth which accelerated in the fourth quarter of 2011 relative to the two prior quarters. Total rail commodity loadings in the fourth quarter of 2011 increased 3.8% versus the same quarter in 2010, with many commodities showing more than a 10% quarter-over-quarter increase. Coal loadings increased by 2.7%, and intermodal loadings increased by 5.5% for the fourth quarter of 2011 when compared to the fourth quarter of 2010.

Coal demand increased in the fourth quarter as utilities worked to replenish coal stockpiles depleted by the hot Summer and the floods that impacted the Midwest early in the year. For the full year, however, coal consumption declined, as US electricity generation in 2011 was down 0.9% when compared to 2010, and as natural gas utilization increased. Coal share as a fuel for US electricity generation was 42.5% in 2011, which was down from 44.8% in 2010. Coal stockpiles have continued their downward trend relative to recent historically high levels, with November 2011 figures 7.9% below last year's level for the same time period, and 3.5% below the average November levels for the last five years. Export activity was strong throughout 2011, reaching 107 million tons for the full year, which is a 31% increase versus 2010, and the highest level since 1991.

Industry-wide, the number of railcars of storage reached roughly 273,000 as of December 31, 2011, an increase of approximately 13,000 railcars when compared to the end of September 2011. We estimate that the number of coal cars in storage also increased from about 3,000 railcars at the end of the third quarter to approximately 9,000 at the end of 2011. We believe the increase in coal cars in storage was largely due to decreased coal rail transit times in the fourth quarter.

For our service segment, fourth quarter repair volumes were negatively impacted as coal car operators delayed scheduled maintenance. We expect repair volumes to normalize as utility stockpile replenishment efforts have largely ended. We continue to focus on optimally operating our repair shops to meet the changing demand.

As I look back on 2011, FreightCar America benefited from a much improved railcar manufacturing market. I am pleased that our management efforts have translated into improved earnings for both the fourth-quarter and full-year 2011. I am also pleased that given our improved results, our Board of Directors has reinstated our regular quarterly dividend, as separately announced today.

While most market indicators were favorable in the fourth quarter of 2011, some have started to show signs of weakness as we have entered into 2012. Average weekly railcar loadings and ton miles for the first six weeks of 2012 are down from the fourth-quarter 2011 averages. Thus far in 2012, coal loadings have decreased relative to 2011 levels, as continued strength in exports has been more than offset by soft demand from utilities, due to the unusually mild Winter, combined with the ongoing low industrial power consumption.

The number of railcars of storage has continued to trend upward in 2012. At the end of January, the Association of American Railroads reported roughly 283,000 railcars in storage. We estimate this includes approximately 23,000 coal cars of storage, up significantly from the end of 2011. While we remain optimistic for 2012, given our backlog and continuation of the Eastern coal car replacement cycle, we continue to carefully monitor these industry trends. Nonetheless, we will continue to manage the business to maximize overall income in 2012 and beyond, while also continuing to look for strategic growth opportunities.

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

Thank you, Ed. Consolidated revenues were $187 million in the fourth quarter of 2011, which were $57 million higher than the previous quarter, and $136 million higher than the fourth quarter of 2010. The increases in revenue reflect the higher number of railcars delivered, the inclusion of the services business, and higher revenue per car. Net income for the fourth quarter of 2011 was $8.5 million or $0.71 per share, compared to a net loss for the fourth quarter of 2010 of $2.5 million or $0.29 a share.

Our manufacturing segment's revenue for the fourth quarter of 2011 rose to $179 million, compared to $122 million in the third quarter of 2011, and $45 million in the fourth quarter of 2010. These increases reflect higher railcar deliveries and increased revenue in car -- excuse me, revenue per car, due in part to products and exchanges, and higher material costs. Operating income for the manufacturing segment was $16.5 million in the fourth quarter or 9.2% of revenues, which was $9.6 million or 3.5% higher during the prior quarter, and $18 million higher than the fourth quarter of 2010. The increase in operating income reflects the increase in deliveries, product mix, and better utilization of manufacturing capacity.

Services segment revenues for the fourth quarter of 2011 were $7.8 million, which were essentially flat with the third quarter of 2011, but $1.8 million higher than the fourth quarter of 2010. The year-over-year increase in the services revenue reflects the inclusion of freightcar rail services for the full quarter ended December 31, 2011, versus only two months in the fourth quarter of 2010, and also reflects higher part sales. Operating income for the services segment was $0.5 million in the fourth quarter of 2011. This was $0.6 million lower than the prior quarter, due to lower-margin part sales and repair work mix. Operating income for the services segment in the fourth quarter of 2010 was $1.0 million, reflecting higher-margin part sales partially offset by lower repair income due to the inclusion of freightcar rail services for only two months.

Corporate costs for the fourth quarter of 2011 were $7.6 million. These costs were up $1.4 million from the third quarter of 2011, due primarily to compensation and other costs incurred in the quarter. Corporate costs for the fourth quarter of 2010 were $5.8 million. The effective tax rate of 9.1% in the fourth quarter of 2011 included a $1.3 million benefit, due to the change in our estimated state tax apportionment on a deferred tax asset balances, and tax deductible goodwill. The full year effective rate of 6.7% includes the taxable goodwill reduction benefit of $0.6 million, and a benefit of $1.7 million related to the change in certain statutory state tax rates and change in our estimated state tax apportionment on our deferred tax balances.

The value of railcars under lease was $54.7 million as of December 31, 2011, which was down $2.5 million from the end of September 2011, due primarily to sales of railcars on lease. Interest in the secondary market for railcars and leases remains strong, and we continue to look for potential re-marketing opportunities for certain of our leased railcars.

Our financial position continues to be strong, with no outstanding debt, and cash on hand at the end of December 2011 of $104 million, up $37 million from the end of September 2011. Working capital, excluding cash, decreased $25 million from the end of the third quarter, as the increase in receivables resulting from the timing of railcar shipments was more than offset by decreases in inventories and receipts of customer deposits. We have no current plans to draw upon our revolving credit facility.

Lastly, as I had mentioned earlier, our Board of Directors has declared a regular quarterly cash dividend of $0.06 per share to be paid on March 5, 2012 to shareholders of record at the close of business on February 27, 2012.

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

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

Hi. Good morning. Congratulations on the improved results.

Thank you, Michael.

My question is on the rebuilds. Obviously, they are going to be lower ASP. My question is on gross profit per dollars per car, what we should expect relative to new cars.

The gross profit percentage shouldn't be very much different than a new car.

Okay. In terms of other car types, I know we spent a lot of time talking about coal. Just some commentary on whether you see some other opportunities as you go through the cycle. Obviously, you have the new intermodal design and a lot of other car types, which some your competitors are getting sold out and certainly trends and pricing appear favorable. So, any thoughts on whether there is some opportunities in some other car types, and if so, can you give us some further clarity on that? Thank you.

Sure, Michael. This is Ted Baun. In general, we are still seeing a number of inquiries out there in the market, mostly non-coal car related at this point. I think coal is in a bit of a holding pattern, given the events in the past four weeks and the mild weather we are seeing. But with respect to the non-coal cars, we are seeing a number of opportunities in open-top gons, open-top offers, and a variety of flat cars. As it relates to intermodal, we still continue our regulatory approval efforts, and we are in front of a number of customers with our DynaStack 53-foot intermodal car. And those initial responses are very favorable, so we're continuing those efforts as well.

Okay. Thank you.

Our next question comes from the line of Sal Vitale from Sterne, Agee. Please go ahead.

Good morning. Good quarter.

Good morning, Sal.

Just a follow-up on the question regarding the rebuilt cars. You are saying the gross profit percentage -- or the gross margin, rather, shouldn't be too different. Can we get a sense for -- earlier you said the ASP would be different. Can we get a sense -- I mean, is it 10% lower? Will it be 20% lower? I mean, I'm not asking for specific numbers, but just by order of magnitude, how much lower can it be?

Again, as you know we don't comment on specific orders, but in this one, it's even tougher, because we don't know the various parts that will come off and have to be replaced, so it's difficult to give you a firm answer on that.

Okay. Just trying to get a sense for what the profitability of these cars could be. Can you give a sense for what the lead time on -- when these cars will be delivered, the 3,300 cars?

Our backlog goes out through 2012 and 2013. Again, we don't comment on specific orders. But our backlog is -- again, will be built over 2012 and some into 2013.

Okay. Can you just refresh my memory? In the past have you done significant numbers of these rebuilt orders of rebuilt cars?

Yes, Sal, we have. Over the course of the past 20 years, we have done these cars before. We have got experience, and it's helping that the customer also feels comfortable with us (inaudible).

Okay. Is there any take-away from the fact that you are getting an order like this? Does it speak to perhaps the level of confidence of the customer in terms of basically they are trying to save money by ordering -- by rebuilding an old car rather than ordering new cars? Or is there something specific that drove this particular order?

This is Ed. I think the backside of this is the customer is trying to maximize the value of his asset, and he is doing it by rebuilding the car rather than substituting the car.

Okay. That makes sense. And then just the last question, can you give us a ballpark estimate of what the size of the North American coal car fleet is currently? Is it still about 280,000 cars?

Yes, that's still accurate.

Okay. So then in terms of how many cars that are currently in storage, so that's about 23,000 cars, so that works out to a little less than 10%, I guess. What is a typical -- I guess, whether it's absolute number of cars in storage or percentage of the overall fleet, what is a more typical number historically?

In general, Sal, the industry might see anywhere between 5,000 and 12,000 coal cars in storage, and I knew about the wide range, but it is a tough question to answer. So I'll just give it to you in those terms. In that situation, it's a fairly fluid market. So that's where we still see new car orders and the like.

Okay. So then, if I look at the high end of that 5,000 to12,000 and how it compares to the 23,000 that are currently in storage, is it something you think that storage would be worked off in the short period?

It's tough to say. Obviously, the mild winter is not favorable. But I will say that if you look historically, it isn't uncommon. We have seen stored trains well above this range, and the industry has a tendency to turn on a dime pretty quickly.

Just one more question on the margin. A very nice margin expansion sequentially, it was up very nicely both on the manufacturing side. Is there any reason to think -- and I know you don't give margin guidance -- but is there -- I guess, what events could result in the margin decelerating from that 5% that you did in 4Q?

As we've talked, as we said, we look at and if you look at what trends over time is margins, which really equates to a railcar pricing trends with deferments of your backlog. The further out your backlog is and the further over time for us in the industry is a pricing increase.

Okay. Thank you. I appreciate it.

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

Good morning, gentlemen. Thanks for taking my call.

Good morning, Brad.

I wanted to ask -- I guess the first question, when I think about the orders you guys received in the fourth quarter, a lot of them being for rebuilds. I guess, where do you have more confidence, I guess, in the momentum going forward? Is it earnings performance, kind of like you have seen order activity like you've seen? I'm not asking for guidance, but what do you have more confidence in the current environment looking forward?

I think as Ed commented in his comments, we are still optimistic on 2012 given where our backlog is at and where we continue to the Eastern coal cars replacement cycle is at, and that's going to continue for some time. Again, as we talked, orders will be lumpy, just the way the railroads and customers order. But I think it's still along those lines.

I guess where I'm getting at, I understand low natural gas prices, mild winter weather. But I'm trying to get a sense of would that really change a customer's decision to buy a 30-year asset because of some unique events that have occurred over the last, say six months or so? Any color on that?

This is Ted. You can chime in here. I think the long-term decision is no, because long-term risk depends on what their long-term needs are. Short-term, it may change the timing of their need and placing orders, but over the long-term, no, we don't think so. And as we've talked over the long-term, natural gas will put pressure on coal for power generation, and we will take some share. But again, even the information coming out from the EIA indicates that coal will continue to grow and the amount of coal for power generation is still expected to grow even with the headwinds from natural gas.

That's great color. So, it's probably more of a timing issue than anything. Okay. And then, finally, I know you guys are looking to get more involved in intermodal-type cars. Any color on what the order activity or what that market is looking like now, let's say relative to other car types?

There was a lot of activity in intermodal about a year ago. So I think the folks that were out purchasing those cars are still digesting them. We are expecting further dialogue as we move forward here in 2012. So, those inquiries tend to be lumpy and larger in magnitude, and so we are going to keep moving forward with our testing and getting ready for those next (inaudible).

Great, guys. Thanks. That's all I had.

Our next question comes from the line of Steve Barger from KeyBanc Capital Markets. Please go ahead.

Hi. This is actually Alex Walsh on for Steve. Thanks for taking my questions. First off, as I think about the rebuilds, does it take the same amount of -- obviously, it takes probably less work to rebuild the new cars. I'm wondering, just from a production standpoint, is it possible to produce more of those with the same amount of capacity than, for instance, a new car? Just trying to think of the cadence of production.

I think we can expect fairly similar production rates, because it is a very extensive rebuilding operation. So, I would think that they will be produced in a similar fashion to a new car.

Okay. And then with regards to the backlog, what percentage for delivery in 2012?

Well over half of it is in 2012 and carry over into 2013.

All right. I guess on new car pricing, given the dynamics that you guys are talking about in terms of cars in storage and demand for coal cars, can you talk at least directionally about the economics of -- or I guess how car pricing is trending and maybe the economics of the new car orders that you have in your backlog?

This is Ed. Even though inquiry levels and orders have been strong, the market remains very competitive across all car types. It continues to be so. I think our improved margins are a function of somewhat improved price but also improvement in manufacturing efficiency.

And then, I know you talked about the long-term coal car replacement cycle still being intact. Of the customers that have multi-year coal car replacement programs out there, has there been any change in terms of the conversations that you guys are having? Is there any propensity to maybe rebuild instead of buy new?

Rebuild is a function of the availability of existing cars to remanufacture, and once they are gone, that opportunity is gone away, so it's a fairly limited opportunity.

Okay. That's all I have for now. Thanks.

Thank you.

Our next question comes from the line of Peter Nesvold from Jefferies & Company. Please go ahead.

Hi, good morning. It's Elliott Waller on for Peter. Congratulations on a strong quarter. A couple housekeeping questions. SG&A run rate for 2012, should that be similar to 2011, or slight uptick over $30 million for the year?

It should be pretty similar. As we talked in the past, you would expect a little bit of salary creep in there as earnings have improved and normal raises are produced. But there's nothing else unusual in the numbers that would change it either way.

Okay, great. How should we think about the tax rate for 2012?

Again, given the nature of the goodwill and other kind of permanent deductions, as you have low levels of income, as you get to more normal levels of income, that rate changes. And again, we benefited -- the number was benefited because we had a change in our apportionment estimate, which was applied to deferred taxes. Again, that number is pretty volatile around where total forecasted income is, and given that we don't give guidance out, we don't give forecasted tax rates either.

Okay, that's fair. You mentioned the -- given the, sounds like the replenishment, the coal cycles is coming to an end and you would expect service revenues to start picking up again. Should we expect that -- to see that in the first quarter of this year?

I think we would expect to see it start to improve in the first quarter and gradually improve as we move out through the following quarters.

Okay. Fair enough. And finally, any issues on the supply side for either parts or castings or anything in that category?

We still watch that very closely, and we manage that very tightly, but as of right now, we have adequate materials to make the cars and turn our backlog.

Very good. Thanks for the time. Congratulations.

Thank you.

Our next question comes from the line of Kristine Kubacki from Avondale Partners. Please go ahead.

Good morning and congratulations.

Thanks, Kristine.

Hopefully I didn't miss this, but I was wondering if you give us a little bit about the cadence of deliveries through the year. And given what is in storage, is there going to be some seasonality in terms of deliveries that we should think about as we go back into our models?

There's really no seasonality to the delivery pattern. The deliveries are based on the individual customer requirements, so there isn't much I can help you with there.

Fair enough. A little longer-term question, you talked about strategic growth opportunities. I was wonder if you could give us a little color on what you are searching for there? And given the cash on the balance sheet, would this be via acquisition and what the acquisition environment looks like and are there opportunities to grow organically?

We certainly intend to continue to grow the service business organically, and we have significant opportunities at our existing facilities. In addition, as we have mentioned in the past, we are interested in growing a service side of the business, and we are continuing to pursue that and will take advantage of opportunities in that area as they present themselves.

Would you say that the pipeline is full of opportunities out there?

I don't know that I can comment on that.

Okay. Fair enough. Thank you very much.

(Operator Instructions). We have a follow-up question from the line of Steve Barger from KeyBanc Capital Market. Please go ahead.

Just one more on the tax rate. I know you guys don't provide explicit guidance on it, but under inter-period tax accounting -- I know you previously had talked about using the year-to-date tax rate for the quarterly tax rate, but given that we are going into 1Q, there really is no year-to-date tax rate. What is a reasonable starting point?

A reasonable starting point is you look for adjustments off your statutory rates. The tax-deductible goodwill benefit will repeat, but again, absent something else that benefiting the fourth quarter on the change in estimate on the apportionment probably should not.

So then, directionally you are talking below statutory?

Given the goodwill deduction, yes, that's what happens.

All right. Thanks, guys.

We have a follow-up question from the line of Peter Nesvold from Jefferies & Company. Please go ahead. Peter, your line is open.

I'm sorry. Thanks for the follow-up. Just want to get your thoughts, how we should think about gross profit per car. And when we look back to the peak of 2006 and 2007, we were in the $12,000 and $13,000 range, and it looks like we finished is this year around the $5,000 range. How should we think about that going forward? Obviously, there is a large gap there, and it feels like we are starting to march toward industry orders that they are improving significantly as we move into the next few years.

Peter, as you know we don't give specific guidance, but I think it's pretty fair in the past to say 2006 was a peak year that had a lot of unique factors that went into it that drove up backlog quite a bit and pricing up quite a bit. And repeating that level of deliveries and profitability would be pretty difficult to achieve, hard to foresee that happening again. I think what we said from a color standpoint is we look back to where our margins and earnings have been around that peak, those are probably the right things to expect going forward.

Okay, great. Thank you again.

Thank you.

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

Just a follow-up question. Really a clarification on something you may have said earlier, I apologize. Did you give any color on the -- if I look at sequentially the ASP on the manufacturing side is up about, I think 7%. Can you give a sense for how much of that is pure price as opposed to materials costs or other factors?

Sal, we don't disclose that level of detail. It is a function of both on the average selling price and mix of commerce and pricing and then also the underlying material component in our pricing structure.

Okay. So, it's fair to say that your pricing is improving sequentially, then?

It's fair.

Okay, thank you.

At this time, there are no other questions in the queue.

Okay. Well, that concludes -- this concludes today's conference call. Thank you for joining. A replay of this call will be available beginning at 1.00 PM Eastern time today at 1-800-475-6701, passcode 236318. Good day. Thanks a lot, everyone.

That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.