FreightCar America Inc (RAIL) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FreightCar America's First Quarter 2013 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 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 1 o'clock p.m. Eastern Daylight Time today until 11:59 p.m. Eastern Daylight Time on June 2, 2013. To access the replay, please dial 800-475-6701. The replay pass code is 291347. 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, President and Chief Operating Officer of FreightCar America.

Thank you and welcome to FreightCar America's first quarter 2013 earnings conference call and webcast. Joining me today are Ed Whalen, CEO; Ted Baun, Senior Vice President, Marketing and Sales; and Terry Heidkamp, Senior Vice President, Operations.

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 2012 Form 10-K for a description of certain business risks, some of which may be outside the control of the Company and 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 2012 Form 10-K and earnings release for the first quarter of 2013 are posted on the Company's website at www.creightcaramerica.com.

I would now like to turn the call over to Ed Whalen, our CEO.

Thank you, Joe, and good morning. Before we review our first-quarter results, I want to comment on the leadership transition we announced last night. As you may have read in our press release, Joe McNeely has been appointed by the Board of Directors to the position of President and Chief Operating Officer effective immediately.

Given the progress we have recently made on our strategic initiatives, the Board of Directors felt that the time was right to begin a leadership transition. As the President and Chief Operating Officer, Joe will focus on running and managing the day-to-day business and executing the Company's strategic plans. He will also continue to oversee the finance function until a successor is hired, which we expect will occur in the third quarter of this year.

As far as my role is concerned, I will remain CEO and will focus on the Company's strategic growth initiatives and support Joe as he transitions into his new role. This is the first step in our leadership transition plan. I am convinced to say I'm a CEO to ensure a smooth and successful transition of the President's role in advancement of our strategic priorities. Once the Board and I are comfortable that the transition has been successfully completed, I will retire from my position as CEO.

Joe is well suited for the President and CEO position. He has a diverse management experience, a comprehensive knowledge of the industry and a deep familiarity with FreightCar America's existing and future challenges and opportunities. These experiences make him well positioned for this role.

Joe joined FreightCar America as our CFO in September 2010 and since that time, has been instrumental in the development of our strategic initiatives. Joe has implemented numerous cost containment projects, rebuilt the finance organization and drove a number of improvements across the Company. Further, he as preserved our healthy financial profile by focusing on cost efficiency and cash generation. I'm excited to work closely with Joe to help FreightCar America achieve our long-term strategic goals and grow value for our shareholders.

Now turning back to our operations, as we expected, this will be a challenging year for coal and for other freight railcar markets. In that regard, we remain focused on executing our strategic initiatives, which include the diversification of our railcar product offerings, implementing a successful start-up of the Shoals plant and improving the returns from our service business and as always effectively managing costs.

As you remember, in conjunction with our fourth-quarter 2012 earnings results, we announced our capacity expansion via the sub-lease of approximately 25% of Navistar, Inc.'s Cherokee, Alabama manufacturing facility. I'm pleased to report that the start-up at the state-of-the-art production facility is progressing as planned. We have installed a management team comprised of both internal and industry veterans to run the facility and we are in the process of staffing and training our early workers.

We have already secured our first order for the facility and are on track to begin production in the third quarter of this year. While our existing facilities will continue to support our coal car products, the Shoals facility will allow us to produce a broad variety of railcars in a cost-effective and efficient manner. Despite the overall lackluster freight railcar market, we are seeing notable interest in our recent introduction of railcar products.

Moving on to our service businesses, we are beginning to see the benefits of our improvement and efforts implemented last year as revenue and operating income were the highest since we acquired the service shops in late 2010. Given the uncertainties in the freight car market and overall economy, we estimate our deliveries for 2013 to be in the 4,000 to 5,000 unit range. Despite this, I am optimistic that through achievements of our strategic objectives, the Company will be well positioned to capitalize on the freight railcar market recovery.

I will now turn the call over to Ted Baun, our Senior Vice President, Marketing and Sales, who will provide an update on our markets and commercial activity.

Thank you, Ed, good morning. To recap, 274 railcars were ordered in the first quarter of 2013 including 174 new cars. This compares to 1,244 new units ordered in the first quarter of 2012 and 473 new railcars ordered in the fourth quarter of 2012. First quarter 2013 deliveries of 1,073 railcars included 448 new and 625 rebuilt railcars. This compares to 2,613 railcars delivered in the first quarter of 2012, including 2,563 new cars and 80 used cars.

There were 1,308 railcars delivered in the fourth quarter of 2012, of which 528 were new and 780 were rebuilt. Our backlog of unfulfilled orders at March 31, 2013 totaled 2,082 railcars compared to 6,934 railcars at March 31, 2012 and 2,881 railcars at December 31, 2012.

Industry-wide, 23,901 units were ordered and 11,952 units were delivered in the first quarter of 2013 with orders up significantly from the first and fourth quarters of 2012 and deliveries down from first quarter 2012 and flat to fourth quarter 2012. Industry-wide backlog increased to 71,704 units at the end of March. The increase in orders and backlog were driven by strong tank car demand, which accounted for 81% of total industry orders in the quarter.

Non-tank car orders of 4,600 units were 400 units higher than the fourth quarter of last year and non-tank car deliveries decreased 500 units to 5,900 units in the first quarter of this year. The overall number of railcars in storage decreased to roughly 311,000 as of March 31, 2013, a decrease of 6,000 railcars when compared to December 31, 2012. We estimate that the number of coal cars in storage increased from about 27,000 at the end of December to approximately 28,000 at the end of March.

US commodity loadings in the first quarter of 2013 were down 3% when compared to the first quarter 2012. While railcar loadings of certain commodities such as chemicals, forest products, motor vehicles and non-metallic minerals exhibited growth, coal loadings continued to be challenged, decreasing 7.9% versus the first quarter of 2012.

Weaknesses in loadings from 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 7.2% versus the same quarter in 2012.

The coal market continues to show mixed results. Rising natural gas prices have increased the demand for thermal coal, which has resulted in a decrease in utility coal stockpiles to 177 million tons, 4.7% below the year-ago stockpile levels. Despite those positive signs, US coal production and rail coal shipment volumes are both down 8% year-over-year. The coal export market, however, saw an increase of 3.5% through February year-over-year to 18 million tons.

Now, I would like to turn the call back to Joe McNeely to address our first-quarter financial results.

Thank you, Ted. Let me start by spending a few minutes talking about my priorities and areas of focus as I transition into my new role of President and Chief Operating Officer. In an effort to make this transition as seamless as possible, as the senior leadership team, the Board of Directors and I have worked closely to carefully map out a plan for the coming months. In addition to managing the day-to-day operations of the business, I will be focusing on four key areas: First, meeting with key customers and suppliers that [will place them] on our strategic direction; two, making the Shoals facility operational and commencing production of non-coal cars at the facility; three, reaching out and updating our shareholders and investment community on the FreightCar America story; and lastly, replacing our current credit facility that expires in July of this year.

We firmly believe that our business strategy is fundamentally strong and remains unchanged. Ed and I will continue to execute our strategic initiatives as we feel this is the best way to address our cyclical market and ensure the long-term success of our Company. I look forward to keeping you updated on our progress and our success going forward and I look forward to meeting with many of you over the coming months.

As Ed mentioned, we've began the process of searching for my successor to fill the CFO role and we expect to have the position filled sometime during the third quarter. In the meantime, I will continue to oversee the finance function with the help of my capable team.

Now, let me give a little color on the quarter results. Consolidated revenues were $88 million in the first quarter of 2013, which were $131 million lower than first quarter 2012 and $29 million lower than the fourth quarter last year. The year-over-year and sequential decrease in revenues reflect a lower number of railcars delivered in a different product mix.

The net results for the first quarter of 2013 was a loss of $2.6 million or $0.22 per diluted share, reflected of the lower deliveries and a non-cash tax charge taken in the quarter that I will address in a moment. Net income for the first quarter of 2012 was $9.7 million or $0.81 per diluted share and was a loss of $1m or $0.08 per diluted share in fourth quarter of last year.

Manufacturing segment revenues for the first quarter of 2013 were $78 million compared to $210 million in the fourth quarter last year and $109 million in the fourth quarter of 2012. The decreases reflect lower railcar deliveries and different mix of railcars sold.

Operating income for the manufacturing segments for the first quarter 2013 was $2.1 million or 2.7% of revenues, which was $21 million or 81 percentage points lower than the first quarter 2012 and $4.4m or 3.2 percentage points lower than the fourth quarter of last year. The decrease in operating income versus prior periods was different by decrease in deliveries and negative impact of lower volumes on our operating efficiency and also product mix changes

Our services segment had a good quarter, with revenues of $9.9 million for the period compared to revenues of $8.6 million in the first quarter 2012 and $7.3 million in the fourth quarter of last year. Operating income for the services segment was $1.3 million in the first quarter 2013 compared to $700,000 in the same period of last year and $100,000 in the fourth quarter of last year. The increase in revenue and operating income reflects a favorable change in work mix and modest pricing improvements.

Corporate costs for the first-quarter 2013 were $2.8 million, a decrease of $4.6 million over the first quarter 2012 and $3.8 million over the fourth quarter of last year During the quarter, we settled some longstanding litigation, which resulted in $3.4 million net reserve reduction. Even without this benefit, selling, general and administrative costs were at their lowest levels since the first quarter of 2011, reflecting lower spending across the board. However, we will incur additional administrative costs related to the Shoals facility in the second and third quarters of this year.

Our income tax provision of $3.1 million included a $3 million net write-down of certain deferred tax assets. The weak near-term outlook for coal car orders and addition of our Shoals facility will change the mix of income from the states we operate in, resulting in a lower projected state effective tax rate. This lower tax rate [applies for a] deferred tax balances, resulted in a write-down of deferred tax assets.

In addition, the projected income in certain states in which we operate may not be sufficient to realize the total value of recorded deferred tax assets related to net operating loss carryforwards. As a result, we took a non-cash charge, reserved a portion of those deferred tax assets. Excluding these write-downs, our effective tax rate was 25.9% for the quarter, which is reflective of a full-year forecasted effective tax rate.

At March 31, 2013, we had 658 railcars on lease with a book value of $43 million, which is unchanged from December of last year. Our financial position remains strong with no outstanding debt and $118 million in cash and short-term investments at quarter-end. The decrease in cash and investments from the 2012 year-end balance of $155 million was driven by the purchase of equipment for the Shoals facility, payment of accounts payable and accruals and reduction in our customer deposits.

To-date, we have set $12.5 million at Shoals facility and expect capital spending on a consolidated basis for all of 2013 to be approximately $20 million. We have no current plans to draw on our current revolving credit facility.

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

(Operator Instructions) Michael Gallo, CL King.

Hi, Good morning.

Good morning, Michael.

Couple questions, can you break down at all how much the startup costs for the Shoals facility were in the quarter and then also in terms of your cost structure, if you had -- how much the cost will be reduced as a result of some of the furloughs at Danville in the second quarter?

(inaudible) don't get off that specifics, there were some costs included of the Shoals as we began our startup here in the first quarter. Again that was only a short period of time. Those costs were about $600,000 in total in the administrative costs that -- total costs that came through. And then in terms of the other costs at Danville, we don't get into that specific guidance.

All right, okay. Second question I have is, it sounds like you've booked your first order at Shoals, I assume that occurred in the second quarter, is that right?

The order for the Shoals was actually booked in the first quarter.

Okay, so that was a factor of that. Can I talk you about just where you're seeing demand on the non-core car type as you market that facility?

Sure, Michael, this is Ted Baun. What we're seeing is, we're looking at an average included level out there I would say and obviously it's predominantly non-coal what we're seeing. So, it's nothing significant either way, I'd say it's just about average.

Right, but in terms of just which car types you're seeing traction?

I would say generally open-top hoppers, open-top gondolas, various flat cars, some rebuild programs.

All right. Okay, great. Thanks very much.

Sure.

Thank you.

Justin Long, Stephens.

Good morning and congratulations, Joe, on the new role.

Thanks, Justin, all right.

Anyway you could provide some more color on the orders that you received for the new Shoals facility in terms of the magnitude and total orders in the quarter and any color on the car type of that orders as well?

Yeah, Justin, we really don't comment on order specifics and I think we'll just leave it as that.

Okay. And how should we think about the ramp of production at Shoals? You mentioned it's expected to start up in the third quarter, but will you wait until you receive incremental orders before you start really ramping production at that facility or is that ramp going to start once you have the equipment and the place on place regardless of how orders trend?

Yes, Justin, in terms of the production, (inaudible) the Shoals, we're going to build the customers' orders and we'll ramp up to meet what the customers' delivery expectations are in terms of when they want the cars delivered.

Okay. So, you would not build any cars on stack?

I won't say that, but traditionally when we build, we try to build to orders.

Okay. On the cash balance, there is a decent amount of cash burn in the quarter. I know there's several moving pieces on the balance sheet that influence that, but given the investment you're making at the Shoals facility, do you think we'll see a similar fluctuation in the cash balance in the second quarter and going forward throughout the year?

I think, the short answer to that is probably not. As you look at what happened in the first quarter with the Shoals investment being a big piece of that and then the others was paydown of accounts payable was a big piece as we had bought a bunch of inventory at year-end, if you recall, we talked about that in the fourth quarter. And if you look at where those balances stand today, we wouldn't expect to see much fluctuation in those.

Okay. And you gave some good color, Joe, on the CapEx expectations for the year, $20 million. I would expect in the second quarter, it would be a relatively heavy CapEx quarter, not quite what we saw in first quarter, but it's really driven by continued investment in Shoals?

Yes, that will be stretched out over the next couple of quarters.

Okay. And then, I think my last question was on the backlog. Any way you could break out the number of rebuilds that are currently in the backlog versus new cars?

Yes, the number of rebuilds in the backlog are, let me just get to that, of the 2,000 -- already Ted mentioned, rebuilds are 1,375.

Okay, great. That's all I had. I appreciate the time.

Thanks, Justin.

Mike Baudendistel, Stifel

Thanks. And congratulations, Joe.

Thank you.

Just wanted to ask on the guidance of 4,000 to 5,000 units delivered in the year. You don't say the guidance for how many of those are new versus rebuilds?

Yes, we don't comment on a mix of that nature, Mike.

Okay. Then, can you remind us on particularly the economics of a new car build for you versus a rebuild? I think you say that the margin percentage is similar, but if you can comment on the difference in maybe, revenue or margins dollars?

Mike, we haven't done that from a competitive standpoint. The percentage we said are pretty comparable and the rebuilds really depend on how expensive those are in that range. That's why we haven't commented specifically on those.

Okay. Then maybe you can talk a little bit higher levels on the services side of the business, some nice growth there. What's your, sort of, strategy for continuing to grow that business?

In terms of the strategy on that, there is definitely potential there. As we've talked in the past, we have the two shops really focusing on the coal cars in the Powder River Basin. There is opportunities to look at replicating that model and then also on the part side of the business and expanding that both organic and inorganically. That's where we see the potential.

Okay, good. And then related to, one of the other analyst had a question, the cash in the quarter, just paying down the payable balances and giving up some working capital, would you expect debt to sort of reverse in the rest of the year or is the working capital going to be more of a neutral impact on your cash flow?

I would think that's a hard question to answer statistically depending on where the builds go and the amount of inventory we have at any kind of period-end. For the future, again we buy inventory for orders. So I would expect it not to change a whole lot and maybe a little upside with as we build through our order book here with the inventory that's already on the books.

Okay, great. Those were my questions, thank you.

Sal Vitale, Sterne Agee.

Good morning and congratulations, Joe.

Thanks, Sal.

Just a few questions. I guess, just first is a clarification, make sure I heard this right. You said that the coal cars in storage increased by about 1,000 cars from or rather decreased 1,000 cars from 28,000 at December 31 to 27,000 at the end of March?

Coal cars in storage were 28,000 at the end of March.

Okay. Up from 27,000 at the end of December?

Yes.

Okay. Thank you very much. Other question, Joe, you mentioned $600,000 of costs at the Shoals facility in 1Q. Is that right?

Yes. On the expense side, yes.

On the expense side, now would that be in corporate expense or would that be on applied to the manufacturing profit?

Applying to the manufacturing profit.

Okay. So then, that's -- so if just look at that, that's worth roughly I guess about 80 basis points of margin. How do we think about -- was there anything else in 1Q that impacted the margin?

There were a couple of things. We had some operating costs in the quarter that were higher than they had been in the past, totaling about $0.5 million in total.

What was the major of those, just curious?

Just various operating costs.

Okay. I guess one-time in nature or there is something we should expect to repeat?

These were higher than we normally would see in a quarter.

Okay, higher than normal. Anything else, I'm just trying to get a sense, I look at the degradation in the margins sequentially and it was pretty significant. And I understand part of that's operating leverage and you said the other two, you said, the part of it is just lower deliveries and then you have the product mix change. I guess on the product mix, is it rebuild versus new car, is that what you are getting at?

No, not necessarily with the kind of the composite mix of cars delivered.

Okay. Can you give a sense -- I know you -- thank you for breaking out the new build versus -- new versus rebuild. Just a clarification, when you say that your new cars, let me just go to that part of my model here, so when you say that old cars were 625, are those the rebuilt cars?

Yes, those were the rebuilt cars.

Those were the rebuilt cars, okay. And then just, the last question is, in the past when you've seen periods of depressed coal market and you've seen a rebound, what is the typical lag time between when you actually see the coal volume start to come back and when you actually see companies and the railroads and et cetera start to open up their check books and place orders?

Sal, this is Ted. In general, the swings occur fairly quickly in both directions. So in the past, when the coal cars swing to the positive, it happens quickly and conversely when the market starts to decline, it declines quickly as well and we've seen that. It's tough to predict what's going to happen in the future. I think we all agree that there is a little bit of a different market dynamic going on right now with natural gas, but I think suffice it to say, when one utility needs coal cars, generally a group of them do. It's not just one or the other.

Yes, and just, Sal, as we've talked in the past, when you look at the coal market, if you even go back to 2011, we started out that year with a lot of coal cars and storage and by year-end, they were basically all in service and changes (inaudible) pretty quick. But you got to remember what we said in the past too, the west market is a more difficult market and that's where a lot of the coal cars and storage are at, the eastern market, we still feel confident that those cars are going to get replaced over time, especially supported by still strong export demand.

Okay, then on the eastern market that you touched on, regarding CSX and Norfolk Southern, do you see them -- do you see any change in their intention to replace their coal car fleet, because I know they have some pretty substantial plans in terms of orders over the next couple of years, do you see anything significantly change there?

No, their long-term strategy is still the same.

Okay, because it sounds like they are delaying it, do you any sense for when they'll start to come back and place those orders?

No, not that we can really comment on.

Right, okay. Thank you very much.

Thanks, Sal.

Matt Brooklier, Longbow Research.

Thanks, good morning. Congratulations, Joe.

Thanks, Matt.

Had a question of the 2013 delivery guide, 4,000 to 5,000 cars. Can you talk to or provide some color as to how much of that will be the Shoals facility versus your core existing operations from a contribution perspective?

Yeah, Matt, we cannot comment on the specifics of that.

Okay. If we look at the average selling price for your cars, realize mix was an impact and was part of the reason why that was down on a year-over-year basis and I also think sequentially, but on just a mix adjusted basis, can you talk to the trends that you saw in first quarter in terms of I guess the different categories of the railcars?

Yes and Ted can comment on some more color here. In general specifics, you don't give out other than to say, this is a pretty competitive freight car market at the moment. I think you saw the industry information on deliveries and orders on the non-tank car side where I think by historical standards, weak. So, it's pretty competitive.

Okay. I mean, I guess, I think that is, pricing a little bit more competitive this year versus last on cars on a mix adjusted basis, it's a fair way of looking at it?

Yes, I would say that's a fair way. I'd say -- it's always competitive. This year might be a little more competitive.

Okay, that's helpful, thank you.

Thanks, Matt.

Barry Haimes, Sage Asset Management.

Good morning, thanks. Had a couple of questions. I'll just kind of go one by one. First, on the $118 million of cash balance, I wasn't sure from your previous comments, do you mean to imply that by year-end cash will be around the same or should we expect it to be up a little or a down a little?

I think it's tough to be precise on that to give any number. Working capital needs to be to satisfy deliveries. In terms of -- if you look at the working, I think the question was around working capital, kind of giving where the balance is at, you wouldn't expect a big change in that, other than maybe inventories going down as we utilize inventory to produce orders.

Okay, great, thanks. And second question is, if I take the delivery guidance of 4,000 to 5,000, you delivered about a little over 1,000 in the first, you got a little over 2,000 in backlog, which is three. So, that would imply you need to get orders another 1,000 to 2,000 of orders in a pretty much the second and third quarter to deliver by the fourth. Am I thinking about that correctly and can you give a sense of where are you seeing interest at that level? Thanks.

Yeah, hi, Barry. Ted again here. Your math is pretty close. And Joe and Ed remind me every day that we need to go get orders. So we are out chasing them down. There are active inquiries and we are pursuing a lot of different inquiries at this point in time.

Okay. Great, thanks. Just two more quick ones. One, you mentioned that 20,000 coal cars in storage, just to put that in perspective, about how big is the total size of the fleet, coal cars?

Yes, that's about, the total size of the fleet was around 280,000 cars plus or minus. So, it's roughly about 10% of the coal car fleet.

Great, thanks. And final one, on Shoals, could you give us some sense of either by deliveries or by revenue what sort of a breakeven level of activity for that facility, thanks?

Yes, Barry, we don't comment on specific plants, plant questions like that.

Okay. Thanks for your help, appreciate it.

Okay.

[Nick Gattus with GTA Investments].

Hey, guys, thanks for taking my call. First question, I just wanted to verify, I think last quarter you reported that the Shoals facility is going to have around 7,000 cars in annual production, is that in the ballpark?

Yes, that's what we said when the facility is fully built out and up and running, it has that capability.

Okay, are you doing intermodals or you just doing the flat tops and gondolas?

What we said is, all of our non-coal car products that we are looking to build there, whether it be flat cars, intermodal cars, other tops, open tops and (inaudible) at our non-coal.

All right. Is there anything specific about your design quality or your actual manufacturing process that you think is going to provide an advantage for you guys over some of your competitors that you seem to be pretty entrenched?

Hi, Nick, there are always those sorts of ways to differentiate our product, but in the end, customers make decisions on price and deliveries. And the other stuff is more pricing on the take if you will.

All right. Great, thanks, guys.

Sure. Thank you.

And at this time, I'm showing no questions in queue.

Okay. Thank you. This concludes today's conference call. Thank you for joining. Replay of this call will be available beginning at 1 p.m. Eastern Time today at 1-800-475-6701, pass code 291437. Good day.

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