FreightCar America Inc (RAIL) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to FreightCar America's second-quarter 2013 earnings conference call and webcast. At this time all participant lines are in a listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared comments.

Please note that this conference is being recorded. An audio replay of the conference call will be available from 1 PM Eastern Time today until midnight on September 5, 2013. To access the replay, please dial 800-475-6701. The replay access code is 298841. 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 second-quarter 2013 earnings conference call and webcast. Joining me today are Ed Whalen, CEO; Ted Baun, Senior Vice President, Marketing and Sales; and Chip Avery, Chief Financial Officer. Terry Heidkamp, Senior Vice President of Operations, who is usually on this call is on vacation and will not be joining us today.

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 2012 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 2012 Form 10-K and earnings release for the second quarter of 2013 are posted on the Company's website at www.FreightCarAmerica.com. I will now turn the call over to Ed Whalen for some introductory comments.

Thank you, Joe, and good morning. This past quarter included some significant milestones for FreightCar. I am pleased to report that the previously announced leadership transition is progressing as planned. Joe is now fully engaged as President and Chief Operating Officer, and we recently announced that Chip Avery has joined us as our new Chief Financial Officer.

We also began production at our Shoals facility and received our first order for our recently introduced five-unit intermodal well car. While freight car demand remains weak, as we expected, we did receive several large orders in July including orders for rebuilt Eastern coal cars.

I firmly believe that the diversification of our product offerings, as exemplified by the startup of the Shoals facility, prudent management of our costs, along with our capable leadership team will position FreightCar for success over the long term. I will now turn the call over to Joe and Ted to discuss last quarter's results in more detail.

Thank you, Ed. Before I begin I would like to take a moment to introduce Chip Avery, who joined us as our Chief Financial Officer last week. As you may have seen in our press release, Chip joins us from Federal Signal where he was corporate controller and chief information officer. Chip's finance, business, and IT experience will be a valuable addition to our leadership team. Chip is currently very busy transitioning into the CFO role, and we're looking forward to meeting and talking with many of you in the coming weeks and months.

Turning back to the business, we remain focused on executing our long-term strategic priorities and to date have made important progress on all of these.

We are pleased with the startup at our Shoals manufacturing facility, production of railcars has begun, and the first order should be delivered later this quarter. Once fully operational this facility will provide us with the flexibility to produce a diverse product offering including production of an intermodal well car order later this year.

Despite the continued drop in coal car loadings, the Eastern coal car replacement cycle continues, as evidenced by the large rebuild orders we received post quarter end. Ted will comment on the intermodal and rebuild orders shortly.

On the Services side of the business, we continue to see positive results from the improvement efforts we began last year. Revenue and operating income increased over the first-quarter levels, which were already at their highest level since we acquired the Service shops in late 2010. We continue to focus on improving and leveraging this important asset.

Lastly, we continue to manage costs closely, with SG&A expenses below last year's level when the Shoal startup costs are removed.

As Ed indicated, the freight car market remains weak. As we crossed the halfway point of the year, orders and deliveries for non-tank cars were below historical averages. Based on our current backlog and outlook we continue to estimate 2013 deliveries in the 4,000 to 5,000 car range.

Despite a slow first half, we should see some volume improvements in the second half of the year, based on reductions in changeovers at our existing facilities and the startup at our Shoals plants. I will now turn the call over to Ted who will provide an update on our markets and commercial activities.

Thank you, Joe. To recap order activity for the period, 693 new railcars of various types were ordered in the second quarter of 2013. This compares to 961 units ordered in the second quarter of 2012 and 274 units ordered in the first quarter of 2013.

We continue to see a fair number of inquiries for non-coal cars despite the sluggish economy. During the quarter, we received our first order for five-unit intermodal well cars, which will be built in our Shoals facility later this year. As you may recall this is an important part of our product diversification strategy that we have been focused on for the last three years.

Second-quarter 2013 deliveries of 710 railcars included 160 new, 200 leased, and 350 rebuilt railcars. This compares to 2,786 railcars delivered in the second quarter of 2012, including 1,815 new, 610 leased, and 361 used cars. There were 1,073 railcars delivered in the first quarter of 2013 of which 448 were new and 625 were rebuilds.

Our backlog of unfulfilled orders at June 30, 2013, total 2,065 railcars compared to 5,109 railcars at June 30, 2012, and 2,082 railcars at March 31, 2013. After the quarter ended we received orders for over 5,500 railcars of various types which includes about 4,000 rebuilt coal cars for the Eastern market.

Like our current rebuild orders, work on these cars will be rather extensive, with revenue per car of about two-thirds of a similar new car. Production of the rebuilds will commence later this year and carry on throughout 2014.

Industrywide, 14,850 units were ordered and 12,511 units were delivered in the second quarter of 2013. Both orders and deliveries were down from the same period of the prior year as well as the first quarter of this year.

Industrywide backlog increased to 73,706 units at the end of June, up from both March of 2013 and a year ago. Orders, deliveries, and backlogs were once again heavily driven by continued strength in the tank car market. Non-tank car demand remained weak by historical standards but was higher as compared to the first quarter.

7,900 units were ordered in the second quarter, which were 3,300 units higher than the first quarter of this year. Non-tank car deliveries, however, decreased 300 units to 5,600 units or about a 25,000 annual pace -- again, well below historical averages.

The overall number of railcars in storage was roughly 304,000 as of June 30, 2013, a decrease of 7,000 railcars when compared to March 31, 2013. We estimate that the number of coal cars in storage decreased from about 28,000 at the end of March to approximately 20,000 at the end of June due to seasonal demand for coal cars.

US commodity loadings in the second quarter of 2013 were flat when compared to the second quarter of 2012. While railcar loadings of certain commodities such as chemicals, motor vehicles, and nonmetallic minerals exhibited growth, coal loadings continued to be challenged, decreasing 1% versus the second quarter of 2012. Intermodal container loadings remained strong for the quarter, however, increasing by 2.7% versus the same quarter in 2012.

The coal market continues to show mixed results. Demand for thermal coal has increased as natural gas prices are about 24% above year-ago levels. This has resulted in a decrease in utilities' coal stockpiles to 178 million tons, 12% below the year-ago stockpile levels.

However, US coal production is down 4% versus 2012 levels and US coal exports through May were down 2.5% to 52 million tons but are still at historically strong levels. Year-to-date total electricity generation in areas where coal competes was flat when compared to 2012.

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

Thank you, Ted. Given that Chip started only three days ago, I will cover the financial highlights. For the second quarter of 2013, consolidated revenues were $47 million compared to $181 million in the second quarter 2012 and $88 million in the first quarter this year. The year-over-year and sequential decrease in revenues reflects a lower number of cars delivered.

Net income for the second quarter of 2013 was a loss of $3.4 million or $0.29 per diluted share, reflective of the lower deliveries. Net income for the second quarter of 2012 was $5.6 million or $0.46 per diluted share, and was a loss of $2.6 million or $0.22 per diluted share in the first quarter of this year.

Manufacturing segment revenues for the second quarter of 2013 were $37 million compared to $172 million in the second quarter of 2012 and $78 million in the first quarter of this year. These decreases reflect lower railcar deliveries due to production line changeovers, the idling of our Danville facility, and the startup of the Shoals facility.

Operating income for the Manufacturing segment for the second-quarter 2013 was a loss of $1 million, which was $16 million lower than the second quarter of last year, and $3 million lower than the first quarter of this year. The operating loss for the quarter reflects a decrease in deliveries and cost of $1.9 million related to the startup of the Shoals, and Danville carrying costs.

Our Services segment had another good quarter with revenues of $10.1 million compared to revenues of $9.4 million in the second quarter of 2012 and $9.9 million in the first quarter of this year. Operating income for the Services segment was $1.6 million in the second quarter of 2013 compared to $700,000 in the same period of the prior year and $1.3 million in the first quarter of this year. The increase in revenue and operating income reflects an increase in volume, modest pricing improvement versus the prior year, and prudent management of operating costs.

Corporate costs for the second-quarter 2013 were $6.2 million, a decrease of $400,000 from the second quarter of 2012, and flat to the first quarter of this year after excluding the first-quarter litigation settlement benefit. Corporate costs for the second quarter of 2013 included $800,000 related to the startup of the Shoals facility, which was offset by lower compensation and consulting-related costs.

The effective tax rate for the quarter was 39.4%, which compares to 40.3% for the same period of last year. At June 30, 2013, we had approximately 850 leased railcars with a book value of $60 million.

Our financial position remains strong, with no outstanding debt and $101 million of cash and short-term investments on hand at quarter end. The decrease in cash and investments from $155 million at the end of 2012 were driven by the investment in Shoals, changes in working capital, and additions to the leased fleet.

Working capital includes $9 million of railcars to be delivered and $26 million of material purchased in advance for orders to be produced to later this year.

As I mentioned during the first quarter's earnings call we have begun working on replacing our revolving credit facility. We have completed this effort in July and entered into a new three-year $50 million revolving credit facility and ended our prior revolving credit facility.

The new credit facility has favorable terms and will give us the liquidity and flexibility needed as we grow the business. The new credit facility is undrawn and we do not have any current plans to draw upon the facility.

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

(Operator Instructions) Michael Gallo, CL King.

Hi, good morning. Congratulations on the improved orders. A question for you. When I look at the backlog at quarter end and the 5,500 or so ordered subsequent to that, how many of those do you expect to ship in 2013 versus '14?

The majority of the orders that we got in the post quarter end are '14 deliveries.

Okay. Then, could you comment at all -- I know you called out intermodal as an area where you picked up some orders. What are you seeing across some of the other non-coal types and whether there are some other orders in there for other types at the Shoals facility as well?

Yes, Hi, Michael. There are a number of other orders -- flat cars, open top gons, open top hoppers. And we may or may not put them in Shoals; those are decisions we will make.

Great, thank you.

Matt Brooklier, Longbow Research.

Yes, thanks. Good morning. Good to hear Shoals is up and running at this point. Can you provide a little bit of color in terms of anticipated production rates in the second half of this year?

As we talked -- now, Shoals is in a startup mode. I think when we looked -- as I commented earlier, total deliveries will be in the 4,000 to 5,000 car range as a total Company, but we don't give plant-specific guidance.

Okay. Then as we are looking out with Shoals I think you've mentioned there was roughly $800,000 of startup costs. Are there incremental startup costs or additional costs to be thinking about with the Shoals as we move into the second half of this year?

Yes, there will still be some continuing. I think as we said last quarter, we expect about -- total startup costs to be in the $2 million range. We still expect that.

Okay, and what have we done to date?

The $800,000 that we mentioned earlier and about $500,000 plus that shows up in the manufacturing costs.

Okay. Okay, very good. Thank you for the time.

Justin Long, Stephens.

Thanks. Good morning, guys. A couple questions on the Shoals facility. So production ramping in the third quarter; you have got some level of orders for that facility in the backlog.

Would you say you expect Shoals to be profitable in the back half of this year? Or is that more likely to be a 2014 event just given some of the startup costs you have discussed?

I think as we said before, this is really a startup year for us. We are happy to have orders and putting orders in there. So it's really going to be a startup.

Profitability really depends on where total volumes are at. And as we talked before, we won't be up to normal production rates at Shoals until next year.

Okay. That makes sense. Maybe to follow up on that, will you be building orders at Shoals -- or building cars that you have just received orders for year to date? Or do you expect to be running at a production rate that's higher than that?

Well, again, I think production rates really depend on where we are at in total orders and what gets assigned to each plant based upon customer delivery preference, capabilities of the plant. So it is really hard to comment where we are going to be at in terms of delivery pace until we know where '14 orders are going to come out.

Okay. I guess I was just wondering if you would build cars on spec in that facility, or if you just going to be building for the orders you have received.

We generally build for orders received. If we build anything on spec it is usually because we think there's orders that are following on right behind it.

Got you. Could you tell me how many cars were in the leased fleet at the end of the quarter? And going forward, what is the right way to think about the level of railcar sales versus lease builds, and just how the overall size of that fleet should progress?

There were about 850 cars at the end of the quarter, and that is about 200 up from where we were at the end of last quarter. I think as we have talked in the past, our lease fleet will fluctuate up and down as that is really a vehicle for us to win the manufacturing sale. The idea is we want to flip those.

So we expect the number of railcars to bounce around somewhere 1,000 cars plus, minus, depending where we are at in the cycle.

That's helpful, thanks. I think my last question, there has been some noise recently regarding litigation with one of the unions and your pension liability. Could you just give us an overall update on that process?

Any potential timing on when we could see a resolution? And maybe looking at a best-case scenario and a worst-case scenario, financial impact on your operations.

Yes, Justin, again, given this is litigation, we are not going to comment on any specifics of the litigation and timing. That will all proceed through the courts as the courts dictate.

In terms of the exposure, the financials include a liability for pension and postemployment benefits. And a big portion of that is related to this situation.

That liability reflects our -- an estimate of what the costs are assuming the previous settlement agreement continues. But as we are in litigation, that amount may increase or decrease as we go forward.

That's fair. I appreciate the time today. Thanks, guys.

Sal Vitale, Sterne Agee.

Good morning, gentlemen. Just a quick housekeeping question, just want to make sure I understand the startup costs.

I think you mentioned about $1.9 million of costs related to Shoals. Now was that for the current quarter?

The $1.9 million was Shoals startup related and Danville carrying costs that show up in the Manufacturing costs.

Okay. So of the $1.9 million I guess the Shoals pieces, you said -- what, $800,000?

The $800,000 is what shows up in the general and administrative line.

Right, and then $500,000 in the Manufacturing?

About, yes.

So that is $1.3 million of the $1.9 million. Okay, so I think I got a handle on that. Then just on the coal car spare capacity, you said it was 20,000 at the end of June, down about 8,000 sequentially.

Any read -- I'm not sure if the statistic is out yet, but maybe even anecdotally. Any read on month of July, if that has come down further?

We do not have any update for the month of July, Sal.

Okay. Then just turning back to the rebuilt cars. You mentioned earlier that we should expect the revenue per car to be about two-thirds of the ASP for similar new cars. I think you have said in the past that we should be modeling that the gross margin percentage should be about the same as for a new car. Is that still current?

Yes, that is what we said. We expect our margin percentage on rebuilds to be in line with new cars.

Okay. Then what are you -- so in the quarter -- well, actually post quarter, since the end of the quarter, did you receive any new coal car orders?

Yes, Sal. Since the third quarter of the 5,500 that we announced, the majority of those were rebuilt coal cars.

Correct, but so -- were there some new coal car orders received at all?

No.

Okay. What would you say is -- just based on the latest, I am not sure if you want to provide the pricing on new coal cars. I don't think you are in the habit of doing that.

But what is -- how should we think about the pricing on that? I assume that that has weakened, say sequentially from 1Q. Any commentary on that?

Yes, Sal, as you know, we don't comment specifically on pricing. And as you go back and look at history of our ASPs, that will give some guidance.

In terms of where pricing is at in the market, the market has been and continues to remain pretty competitive on the freight car side.

Okay. Thank you very much for your time.

Steve Barger, KeyBank Capital Markets.

Hey, this is actually Tej just filling in for Steve. A lot of my questions have already been taken, but just a few others here.

Margins in the Services business came in quite well. Just wondering; was there any one-time things in there? Or is that sustainably above 15% now?

There was nothing one-time-ish in the quarter.

Okay. Then just with regards to the orders, if I could ask one more on that. So good orders subsequent to the quarter end. Just wondering; what was the interaction with customer? Just if you could provide some more color there.

And then just a view going forward? Is this the beginning of that Eastern coal car fleet just being unlocked here?

Let me -- just to start out, I think we have to keep in mind that orders on our railcars are typically lumpy, and this is another quarter where we see that. And on the Eastern coal car, that replacement cycle has begun a couple years ago and continues, although the orders come in big chunks as we said in the past.

Aside from that maybe Ted can just comment a couple more on what customer interactions are.

Sure. I think it remains the same for the Eastern coal car business. And beyond that I think the customer interactions are -- there seems to be a trend in increased inquiry for non-coal car types.

Great. Then just with regards to your capacity, any reason why you can't get to 1,500 per quarter again?

That would really depend on where the freight car market is at. I think as we said, through the first half of the year orders and deliveries on the freight car side have been well off historical norms or averages. And I think it will really depend on where the freight car market is at going forward.

All right, well great. Thanks, guys. That's all I had.

Barry Haimes, Sage Asset Management.

Hi, thanks for doing the call. Quick question. Of the 1,500 orders that came after the quarter, that weren't the rebuilt cars, could you characterize what kind of car types those were for, and whether any of those were for your lease fleet? Thanks

Yes, we generally don't comment on specifics. I think suffice it to say it is along the lines of what we said before -- other non-coal hoppers, non-coal gondolas, and/or flat cars.

Was any of that for the lease fleet?

No.

Great. Thanks a lot. Appreciate it.

Mike Baudendistel, Stifel.

Thank you. Just wanted to ask, with all the rebuilds in the quarter, for those orders, how is the throughput on the rebuilds as compared to the new cars? Are they higher throughput or lower throughput when thinking about the cadence of deliveries?

The cadence of deliveries, these are pretty extensive rebuilds, so the cadence of delivery is like a new car.

Okay. Similar to a new car? And just wanted to also ask, do you have a sense whether those rebuilds were for the export coal markets or the domestic coal markets?

We generally don't have a sense. We firmly believe it is to supply the Eastern Class I railroads with an aging fleet that is falling out. So what they do with those cars, we believe it is across-the-board. It is for exports and domestic business.

Okay. Are those the hybrid cars, that are steel and aluminum?

It is a mixture of hybrid, steel and aluminum, as well as just regular stainless steel cars.

Great. Those were all the questions I had. Thanks.

At this time there are no further questions.

Thank you. This concludes today's conference. Thank you for joining.

A replay of this call will be available beginning at 1 PM Eastern Time today, at 1-800-475-6701, pass code 298841. Good day.

Ladies and gentlemen, that does include your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.