FreightCar America Inc (RAIL) 2012 Q3 法說會逐字稿

Welcome to FreightCar America's third-quarter 2012 earnings conference call and webcast. At this time, all participants' 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 and an audio replay of the conference call will be available from 1 p.m. Eastern daylight time today until midnight Eastern Standard Time on December 1, 2012. To access the replay, please dial 1-800-475-6701. The replay passcode is 268906. 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 third-quarter 2012 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.

Before we begin, I would like to remind everyone that statements made during this conference call relating to the Company's expected future performance, future business prospects, or 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 2011 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 2011 Form 10-K and earnings release for the third quarter of 2012 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. I am pleased to report a solid quarter for FreightCar America, as we registered year-over-year improvements in both our top and bottom line despite the significant headwinds in the coal market and continuing economic uncertainty.

To recap order activity, 225 new railcars were ordered in the third quarter of 2012, compared to 2,485 new and 355 leased railcars ordered in the third quarter of 2011. In the second quarter of 2012, 961 railcars were ordered, of which 600 were new. We delivered 1,618 railcars in the third quarter of 2012, which included 998 new and 620 rebuilt railcars, in line with our previously stated reduced expectations for the second half of the year. This compares to 1,515 new railcars delivered in the third quarter of 2011. There were 2,786 railcars delivered in the second quarter of 2012, of which 1,815 were new, 361 were used, and 610 were leased cars.

Our backlog of unfulfilled orders at September 30, 2012 was 3,716 railcars compared to 6,311 railcars at September 30, 2011 and 5,109 at June 30, 2012. Industrywide, 15,151 units were ordered and 12,346 were delivered in the third quarter. Industrywide backlog increased to 61,400 units at the end of September. Non-tank car orders were 6,319 units and deliveries were 7,854 units. The overall number of railcars in storage declined to roughly 309,000 as of September 30, 2012, a decrease of 9,000 railcars when compared to June 30, 2012. We also estimate that the number of coal cars in storage decreased from about 33,000 at the end of June to approximately 22,000 at the end of September.

US commodity loadings in the third quarter of 2012 were down 1.9% when compared to the third quarter of 2011. While railcars of certain commodities such as chemicals, motor vehicles, and equipment exhibited growth, coal loadings continued to be challenged, decreasing 7.3% versus the third quarter of 2011. Weakness in loadings for metallic ores and metals, along with agricultural products, also contributed to the overall decline in loadings. Intermodal container loadings remained strong for the quarter, increasing by 6.1% versus the same quarter in 2011.

US electricity generation where coal competes as a power-generating fuel was down 2.2% year to date through September compared to the same period in 2011. Overall US coal production was down 5.7% year to date versus the same period last year. Relatively low natural gas prices and low electric power consumption continued to negatively impact coal demand. While natural gas prices have trended higher in recent months, prices are still generally below levels, which would yield a meaningful positive impact on coal demand in the near term.

The Energy Information Administration's latest estimate for coal stockpiles as of July 2012 is 185 million tons, 33% above the 10-year average and 25% above the year-ago stockpile levels. A hotter than normal summer helped to significantly reduce utility coal stockpiles from the near record levels of 203 million tons experienced in May. However, coal stockpiles still remain elevated relative to historical average levels, and are forecasted to end the year at 187 million tons.

The latest data available indicates that US coal exports were up about 25% year-over-year to approximately 88 million tons at the end of August. Energy Information Administration predicts for [GX] coal exports to reach a record 125 million tons in 2012. However, in recent months the pace of export activity has slowed with a weakening of global demand for coal.

In terms of our performance for the third quarter, our manufacturing segment produced another solid quarter as we began to deliver our rebuild program delivered other coal and non-coal railcars and continued to receive orders for non-coal cars. To enhance our capability to more efficiently produce a more diverse railcar product line, we invested in our facilities during the quarter. The first non-coal railcars to be manufactured using these enhanced capabilities will be delivered in the fourth quarter of this year. We have completed technical testing with respect to our three-unit, 353 foot double stack well car design, and our prototype car is currently in revenue service. We are actively marketing our intermodal product line.

Our service segment revenue increased versus the same quarter last year, but decreased slightly over the second quarter of this year. Last year, our repair network was negatively impacted by missed shoppings as a result as the railroads kept coal cars in service to catch up from last year's Midwest flooding. While that situation has abated, we have seen a shift in mix toward lower margin repair work. As a result, repair and aftermarket operating income decreased in the quarter.

At the current time, visibility for 2013 is limited. Some of the factors contributing to this lack of clarity and to uncertain outcome of the upcoming election, the ultimate resolution of the fiscal cliff, this implication for broader tax policy and ongoing regulatory and general macroeconomic uncertainty. In addition, these uncertainties are also reflected in varying views on the outlook for energy demand as well as the mix of fuel sources. We have successfully managed through uncertainty in the past and our strong balance sheet provides the foundation from which we can manage through current business conditions.

While year to date results have been in line with our expectations, we anticipate that the fourth quarter will be weaker than the third quarter. As I have stated previously, we expect coal car demand to be depressed in the near term. Under these less than ideal conditions, we continue to optimize our operational flexibility, diversify our product offerings, and focus on delivering quality railcars and services to our customers.

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. Consolidated revenues were $161 million for the third quarter of 2012, which were $31 million higher than the third quarter of 2011, but $20 million lower than the second quarter this year. The year-over-year increase in revenues reflects a higher number of railcars delivered, which includes 240 lead cars that were sold in the quarter, favorable product mix, and improved pricing. Revenues in the quarter were lower than the second quarter this year due to a lower number of new car deliveries.

Net income for the third quarter of 2012 was $4.8 million, or $0.40 per diluted share, compared to a net loss for the third quarter of 2011 of $2.4 million or a loss of $0.20 per share. Net income was $5.6 million or $0.46 per diluted share in the second quarter of 2012.

Manufacturing segment revenues for the third quarter of 2012 were $152 million compared to $122 million in the third quarter of 2011 and $172 million in the second quarter of 2012. The increase from 2011 reflects higher railcar deliveries, including leased car sales, and higher average selling prices, as I mentioned before.

In the third quarter of 2012, operating income for the Manufacturing segment was $13.9 million, or 9.1% of revenues, which was $7 million, or 3.5 percentage points higher than the third quarter of 2011 and $1.4 million lower or flat as a percentage with the second quarter of this year. The increase in operating income versus 2011 reflects the increase in deliveries, product mix and somewhat better pricing of car types delivered in the quarter.

As Ed indicated, our services segment was impacted by a shift in work mix toward lower margin repair work. Revenues for the third quarter of 2012 were $8.1 million compared to $7.9 million in the third quarter of 2011 and $9.4 million in the second quarter of 2012. However, operating income for the services segment was approximately $600,000 in the third quarter of 2012. This was $500,000 lower than the third quarter of 2011 and $100,000 lower than the second quarter of this year.

Corporate costs for the third quarter of 2012 were $6.6 million. These costs were $400,000 higher than the third quarter of 2011, but flat with second quarter of this year. The year-over-year increase reflects additional competition costs, consulting related expenses, and costs related to enhancing our production line for the new product types that we mentioned earlier. The effective tax rate in the third quarter of 2012 was 38.8%, which reflects a full year tax rate of 39.2%. At September 30, 2012, we had 758 rail cars on lease with a net book value of $51 million versus 998 railcars on lease with a net book value of $67 million as of June 30, 2012.

Our financial position continues to be strong with no outstanding debt and total cash on hand at the end of September 2012 of $144 million. This is up $20 million from the end of June 2012 primarily due to the reduction in inventory, partially offset by increases in receivables and decreases in accounts payable. We have no plan to draw upon our revolving credit facility at this time.

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

Thank you. (Operator Instructions) And our first question, we'll go to Michael Gallo of CL Car. Please go ahead.

CL King. Good morning. A couple questions. How much of the backlog do you expect at this time will ship in Q4?

I'm not sure of the question.

Oh, in terms of the number of units and backlog. I think you said that you expected the shipments to be lower in Q4. I was wondering how much of the backlog you think will shift this year as opposed to 2013.

Michael, we don't give out that level of detail, but as we said in the past, our backlog will get delivered over the next couple of quarters into the second quarter of next year.

Second question I have is just on some of the changes you've made in terms of being able to manufacture other car types. I was wondering, other than your modal, what other car types this will enable you to manufacture and was this a bottleneck in terms of getting orders as you didn't have some of these changes in place. Non-deductible would you expect that with that, those changes, you'll be in better position to secure others for other car types?

Sure. What these investments have allowed us to do is to make a much wider variety of welded railcars than we've been able to do -- make in the past and it's allowed us to make more efficient -- produce them more efficiently and make more rapid changeovers from one car type to the other. So we will now be able to make wide variety of both welded and mechanically fastened non-coal cars.

Thanks very much.

And we'll go to Peter Nesvold with Jefferies and Company. Please go ahead.

Hi. Good morning. Congratulations on the good quarter. It's actually Elliott [Waller] on for Peter. If you could just talk to how you plan to conserve cash, should coal car and overall order demand continue to slow?

Certainly. We are -- in view of the somewhat weakened and uncertain outlook for 2013, we are redoubling our efforts at cost control. And so we will be quite aggressively looking at G&A and corporate expenses as we go forward for the remainder of this year and 2013.

Okay. That said, should we expect a sequential improvement in the SG&A line on a dollar basis going forward?

Michael, the quarter did include some consulting costs for projects that we had completed here in the third quarter, along with the cost control efforts that we just talked about.

Okay, great. And then just to clarify, you had mentioned some improved ASPs. If you could just talk about what's driving that.

On the average selling price, there's a couple of pieces of that. Part of that, as I indicated or Ed indicated is that it's product mix is the type of cars that are in there. And there is some modest price improvement as we deliver cars that were taken on order at the end of last year.

Finally, if you could just give a sense of what the mix was on new orders for the quarter?

There have been orders since the end of the quarter, but order rates continue to be modest.

I'm sorry, in terms of the types of cars that you saw for the quarter that was just reported?

We don't give our specifics on the types of cars ordered in the quarter, other than these were non-coal cars.

Thank you.

We'll go to Eric Crawford with UBS. Please go ahead.

A couple questions, if I could get some more color on the [lead fleet]. How much revenue did the sale of 240 railcars generate?

We don't give out specifics on deal transactions. That from our standpoint was, given these cars were delivered in the second quarter, put on lease and sold, we treat them in account form just like the sale of regular inventory.

I had to try there. Were the 225 railcars ordered in the quarter to external customers or were those to replenish the lead fleet?

Those were to external customers.

And if you could speak on the customers, conversations you're having with customers. Have they generally been more receptive to rebuilds rather than new or for coal, or have they been -- what's the inquiry level like on some of the introductions of different railcar types that you're looking at?

Hi, Eric. This is Ted Baun. In general, the customer inquiries are down. I think a lot of our customers are in wait and see mode, just like a lot of us are here. So there is still activity, but it's depressed from where we would typically see it.

We'll go to Matt Brooklier with Longbow Research. Please go ahead.

Thanks. Good morning. Just trying to think about the mix between new railcars and the rebuilds on a go-forward basis, and if we look in the quarter, should we assume kind of a similar rate of rebuilds going forward versus new railcar deliveries? Maybe you could just provide us a little bit of color on that.

Matt, we don't give out that little detail. I think you have to look at the backlog and again, as we've said before, now there are 3,300 rebuilds in total and we started delivering those, that and the other cars will get delivered here over the next three quarters through the second quarter of next year.

I'm sorry. How many rebuilds are currently in the backlog?

There was 3,300 in total and we delivered 600 I think was the number this quarter, 620.

Okay, so take the 3,300 and the 620 out of that should get me to the current number.

Correct.

(Operator Instructions) And we'll go to Steve Barger with KeyBanc Capital Markets. Please go ahead.

Sorry about that. This is [Tages] actually filling in for Steve. It seems like a lot of the other analysts already got to some of the questions I had. But additional one I had that you haven't touched on yet with regards to if you're seeing any kind of pressure on component part pricing.

I think component part pricing is fairly stable right now. We're not seeing a large effort toward price increases.

Okay, and then just with regard in the quarter the implied revenue per car was sequentially higher, more in line with 1Q. Is that going to be sustainable going forward or is that because you did more new cars versus rebuilds?

There's a lot of factors in that and without getting -- since we don't give out guidance, as we said in the quarter, there was some modest price improvement. There was also a lot of product mix affecting those numbers.

Are you able to provide any sort of color on that product mix?

No more than we've already given.

Thank you.

And we'll go to John Evans with Edmund White Partners. Please go ahead.

You talked about that you're putting cost constraints in, et cetera. So your SG&A was $8.2 million basically in the quarter. Can you give us any sense of how much fluff is in there or how much you can take out from a cost standpoint? Or is this pretty barebones?

Well, in terms of, as I mentioned before in some of the drivers, there was probably about $500,000 in consulting costs in the quarter for projects that we initiated in the quarter. And in terms of the ongoing kind of cost management we'll do that, we won't give out specific guidance on that.

I'm sorry, you said how much was in additional costs since one time?

On the consulting side it was about $500,000 of cost that ran through the quarter.

So basically you're saying that the run rate is about [7.7] and if you think about 7.7 as being the run rate, is there much cost to be taken out from there or not?

There's always room. As we talked I think on the last quarter even as we talked about cost management and I think somebody had a similar question. There's always places to look at our cost structure in terms of P&E, looking at consulting costs. There is ability to take some cost out, but as we've also said, as a general rule there's been some of these projects that can happen in any one quarter, we like the level of G&A we're at.

So in a cycle, when you're going down what's kind of the decrementals that you try to achieve? I'm not asking you for guidance, but there's got to be some kind of range of decrementals when you're going down. Can you give us something like that?

In terms of revenue, operating cost, or -- ?

No, your decremental margin. So you have an incremental margin when you're on the mountain going up and when you're coming down you have a decremental margin. So what would you shoot for as your decremental margin range?

I guess what I'd point you to is if you go back and look through our filings and history, you can see where the margins have gone throughout the cycle up and down. They bring from very high in 2006 to very low in 2010.

So then the question I would ask you, is this cycle not different than any other cycle? So you don't think it's going to be any different relative? You think the decremental will basically --

I guess the answer is we don't know yet because we aren't there. We're sort of -- we're not sure exactly where the cycle is going from here I guess. I would have to say primarily because of the nature of the economy and this recovery. We only have a 1% growth rate. Normally at this point in the cycle we're growing much more rapidly and demand for cars is increasing. So this is not a typical cycle, and so I'm afraid we don't have much visibility where we're going from here.

Then the last question I would ask is, people seem to be excited about you getting into or diversifying your business away from railcars. Why do you think you'll be successful in that? And will you only have to compete on price? It looks like one of your competitors today cut their outlook for next year just for the cars that are going to be delivered. So it sounds like the markets are shrinking. And I'm just curious, in a shrinking market how do you compete? Is there some whiz bam thing you have on your new cars that makes me want to buy yours? Or is it just you're going to compete on price?

First of all, we've been in these markets before in our history, and secondly, we believe that we have unique features on our cars that make our cars more desirable perhaps than others. And so we'll be competing of course on price and delivery, but we also believe we have designs that are of interest to our customers and will encourage them to be buying our products.

We'll go to Mike Baudendistel from Stifel Nicolaus.

Thanks for taking my questions and congrats on the quarter. Looking at orders for 3Q and I guess so far into the fourth quarter, I know you won't give specifics, but have there been orders for the new intermodal car?

No, we have had no orders. We have the prototype car in service.

Then kind of shifting gears way from the manufacturing side into the services business, I understand you're seeing some lower margin work. Are you seeing a higher volume of that lower margin work? And is there anything more that you can be doing within the services segment to ramp that up as we go through this cycle?

Yes, we have seen a slightly higher volume of work running through the shops. We've spent this year aggressively attacking the operation at the shops and cost at the shops and we have seen some of that benefit come through, and we expect to see more benefit come through of that going forward. But unfortunately, there's been a series of difficult situations we've dealt with this year starting with the floods this year and now with the -- what's happened currently with the volume of cars moving that have had a -- and also mix, that have had a negative impact on the shop operations. We're not happy with the operation of the shops and we're working very aggressively to turn that around.

We'll go to Sal Vitale from Sterne Agee. Please go ahead. Mr. Vitale, your line is open. And we'll go to Peter Nesvold from Jefferies and Company.

Hi. Thanks for the follow-up. Again, it's Elliott Waller for Peter. Just a quick question, crystal ball question. I know you guys mentioned obviously there's a lot of uncertainty both near term and longer term, and other companies have clearly mentioned that. And we have the elections, fiscal cliff, tax issues that everyone is focused on for the next few months. Just wanted to get your thoughts either directionally in terms of how you think overall deliveries will trend for next year for the industry. And then in terms of what's out there in front of us in terms of creating the uncertainty, when you think that would start to dissipate and you get better clarity. Thanks.

I think the industry forecasts are for deliveries in the upper 40,000 range for next year and I guess that number is -- there's several different forecasters who are in that range, and I guess for now given the lack of visibility we have, we'll go with that.

Just to add, a good portion of those deliveries at least from the backlog side are tank cars.

That's true. With respect to when visibility is going to get better, that's pretty difficult. I guess if you can tell me when the economy is going to start growing faster than 1% a year, I think we can give you a much better view of what's going to happen to the railcar supply industry in general. But it's really tough right now and I think you're seeing that in the comments made and on earnings calls throughout the manufacturing side, manufacturing world in the US today.

Thank you again.

(Operator Instructions) And we'll go to Sal Vitale from Sterne Agee. Please go ahead.

Thank you for taking my question. Just a quick question. So given the lull in orders and I'm not sure if you -- sorry, I'm hopping on this call a little late, so I'm not sure if you mentioned what your orders would be for 4Q or into the new year?

Well, as you know, we don't give guidance. So we can't make a projection there.

Right. So given the low end orders, is there any progress you think you can make on the cost side in reducing your SG&A, perhaps headcount reductions?

I think as we mentioned earlier, we are aggressively looking at our costs across the board, operating costs, SG&A, and we're going to be -- we have always been pretty aggressive at controlling those costs and we're turning up the burner on that activity right now.

Then just the second follow-up question on that was on the gross profit per car. I noticed the last few quarters it's jumped around a bit. Sequentially it's gone up pretty significantly in 3Q. Is there anything that's affecting that, perhaps the pace of deliveries of rebuilt cars?

Primarily due to product mix.

So should we expect that to continue to bounce around over the next few quarters or is there some -- ?

You're going to see that because the product mix is changing all the time. Our delivery mix is always changing.

Thank you.

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

This concludes today's conference call. Thank you for joining. A replay of this call will be available beginning at 1 p.m. Eastern Time today at 1-800-475-6701, pound code 268906. Good day and thank you for listening.

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