FreightCar America Inc (RAIL) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to FreightCar America's Third Quarter 2013 Earning 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 Daylight Time today until 11:59 PM Eastern Standard Time on November 30, 2013.

To access the replay, please dial 800-475-6701. The replay pass code is 306164. 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 Chip Avery, Chief Financial Officer of FreightCar America. Please go ahead.

Thank you and welcome to FreightCar America's third quarter 2013 earnings call and webcast. Joining me today are Joe McNeely, President and CEO; and Ted Baun, Senior Vice President, Marketing and Sales.

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 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 third quarter of 2013 are posted on the Company's website at www.freightcaramerica.com.

Let me now turn the call over to Joe McNeely.

Thank you, Chip. I'd like to take a moment to address certain organization changes that have been announced over the past few weeks.

First I want to thank Ed Whalen for his numerous contributions to FreightCar during his tenure as President and Chief Executive Officer. Ed started with the Company in 1991 and served as Chief Executive Officer since 2009. Ed successfully led the Company through the recent severe economic downturn and oversaw the diversification of our business while maintaining the Company's financial strength. We are grateful for his tireless efforts and commitment to the Company and we wish him well in his retirement.

In addition, as you're aware, last week we announced a number of changes to our leadership team. While each change is important to our success, there is one change I'd like to highlight. The introduction of new railcars to our product portfolio is critical to the long-term success of our broader diversification strategy. To ensure we are developing the railcars that market desires and to have a proper accountability across the organization, we established a cross-functional new product development team reporting to me that will be led by Greg Josephson. Greg has an 18-year track record in working with customers and in cross-functional lines in developing innovative railcars for FreightCar. With his railcar knowledge, product development expertise and the ability to work closely with our customers, we will be able to continue with the introduction of new railcars that our customers desire.

Turning to our performance, we believe that third quarter was an inflection point for us. While the quarter produced a net loss, we did see sequential improvements in orders, deliveries, backlog, revenue and margin. While the broader coal market remains under pressure. We are encouraged by the continued replacement of the Eastern coal car fleet as evidenced by the large rebuild orders we received during the third quarter.

We remain focused in the execution of our product diversification strategy. The start-up of our Shoals facility is on track. One production line is operational and we are progressing on the build-out of our remaining production capacity. Our initial orders are about complete and will be shipped shortly. In addition, we have begun production of our first double-stack intermodal railcar with orders for several other car types scheduled for 2014.

We are pleased with the efficiency of the facility, the responsiveness of our suppliers, the skill of our workforce and the team we have the assembled to operate the facility.

For the full year 2013 with the Shoals production and fewer production line changeovers in the fourth quarter, we estimate 2013 deliveries to be around 4,000 railcars.

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 both increased over the same period in 2012 and we expect to see this trend continue through year-end and into 2014.

Finally, corporate cost for the third quarter decreased both sequentially and versus the same period of the prior year and Chip will have a comment on this in a moment.

I'm honored to lead FreightCar during this important time in our history. With our new leadership team, I am confident we are well positioned to respond quickly to changes in our markets, including [getting] new products for customers, growing the value of our services platform and achieving a lean structure that will provide clear lines of sight in achievement of these goals all of which will drive increasing value for our customers, shareholders and employees.

Ted will now provide an update on our markets and commercial activities.

Thank you, Joe. To recap, order activity for the period, 6,001 railcars of various types were ordered in the third quarter of 2013. This compares to 225 units ordered in the third quarter of 2012 and 693 railcars ordered in the second quarter of 2013.

Third-quarter orders include approximately 4,000 previously mentioned rebuilt cars in addition to various other car types. Third quarter 2013 deliveries of 937 railcars included 194 new and 743 rebuilt railcars. This compares to 1,618 railcars delivered in the third quarter of 2012, including 998 new cars and 620 rebuilt cars.

There were 710 railcars delivered in the second quarter of 2013, of which 116 were new, 200 were leased and 350 were rebuilds. Our backlog of unfulfilled orders at September 30, 2013 increased significantly to 7,129 railcars, compared to 3,716 railcars at September 30, 2012 and 2,065 railcars at June 30, 2013.

Industry-wide 12,753 units were ordered and 12,647 units were delivered in the third quarter of 2013. Orders were down from the third quarter of 2012 as well as the second quarter of this year but deliveries were up when compared to both the prior-year period and sequentially.

Industry-wide backlog increased to 73,848 units at the end of September, up from both June of 2013 (inaudible). Orders, deliveries, and backlogs were once again heavily driven by continued strength in tank car demand. Non-tank car demand remained below average by historical standards with 7,600 units ordered in the third quarter compared to 7,900 units in [the second quarter this] year.

Non-tank car deliveries also decreased to 5,100 units from 5,600 units in the second quarter. The aforementioned industry figures do not include our rebuild order and delivery activity.

The overall number of railcars in storage decreased to roughly 297,000 as of September 30, 2013, a decrease of 3,000 railcars when compared to June 30, 2013.

We estimate that the number of coal cars in storage remained relatively high at 21,000 coal cars about the same as the end of the second quarter.

US commodity loadings in the third quarter of 2013 were essentially flat when compared to the third quarter of 2012. While railcar loadings of certain commodities such as petroleum products, crushed stone, sand and gravel and non-metallic minerals exhibited growth, coal loadings continued to be challenged, decreasing 3% versus the third quarter of 2012. Intermodal container loadings remained strong for the quarter, increasing by 4.1% 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 35% above year-ago levels. This has contributed to a decrease in utility coal stockpiles to 156 million tons, 12.2% below the year-ago stockpile levels. However, US coal production is down 2.1% versus 2012 levels and US coal exports through July were down 9.6% to 70 million tons but are still at historically strong levels throughout the first half of the year. Year-to-date total electricity generation in areas where coal competes was down 0.6% when compared to 2012.

Now I would like to turn the call over to Chip to address our third-quarter financial results.

Thank you, Ted. For the third quarter of 2013, consolidated revenues were $76 million compared to $161 million in the third quarter of 2012 and $47 million in the second quarter of this year. The year-over-year decrease in revenues reflects the lower number of cars delivered while the sequential increase reflects an increase in cars delivered.

Net loss for the third quarter of 2013 was $900,000 or a loss of $0.08 per diluted share reflective of the lower deliveries. Net income for the third quarter of 2012 was $4.8 million or $0.40 per diluted share and with a net loss of $3.4 million or a loss of $0.29 per diluted share in the second quarter of this year.

Manufacturing segment revenues for the third quarter of 2013 were $67 million compared to $152 million in the third quarter of 2012 and $37 million in the second quarter of this year. Again, the year-over-year decrease in revenues reflects the lower number of cars delivered while the sequential increase reflects an increase in the cars delivered.

Operating income for the manufacturing segment for the third quarter of 2013 was $4.3 million, which is about $10 million lower than the third quarter of last year but approximately $5 million higher than the second quarter of this year. As compared to the prior year manufacturing segment operating income for the current quarter reflects the lower volume and $3.3 million of Shoals start-up and Danville carrying costs.

The services segment had revenues of $9 million compared to revenues of $8.1 million in the third quarter of 2012 and $10.1 million in the second quarter of this year. Operating income for the services segment was approximately $700,000 in the third quarter of 2013, compared to $600,000 in the same period of the prior year and $1.6 million in the second quarter of this year. The sequential decrease reflected a lower volume of product sales as car owners appear to have slowed the pace of large program work.

Corporate costs for the third quarter of 2013 were $6 million, a decrease of $600,000 from the third quarter of 2012 and a $200,000 reduction from the second quarter of this year. Corporate costs for the third quarter of 2013 included $400,000 related to the startup of our Shoals facility which was offset by lower compensation and consulting costs.

The effective tax rate for the quarter was 20.8%, which reflects a reduction of the full-year effective tax rate, excluding discrete items, to 40.1%. At September 30, 2013. We had approximately 750 leased railcars with a book value of $53 million.

Our financial position is strong with no outstanding debt and $102 million in cash and short-term investments at quarter-end.

The decrease in cash and investments from $155 million at the end of 2012 was driven by the investment in the Shoals facility, changes in working capital and additions to the lease fleet.

During the quarter, we entered into a new three-year $50 million revolving credit facility, replacing the existing $30 million credit facility. The new facility has favorable terms and will give us the liquidity and flexibility needed as we grow the business. This ends our prepared comments, and we are now ready to address your questions.

(Operator Instructions) Michael Gallo, CL King.

Hi, good morning.

Good morning, Mike.

Congratulations on the improvement.

Thank you.

I was wondering if you could elaborate, I know you highlighted certainly third quarter and a lot of areas seem to be in inflection points for the Company. I was wondering if you can elaborate on some of the traction that you're seeing among other car types. Certainly out of what was ordered industry-wide, you did very well kind of from a standing start even excluding the car rebuild. So, I was wondering if you can elaborate on where you're seeing traction in car types, whether that continues in the fourth quarter and then also if you can give us any commentary on whether you think you'll see more Eastern coal fleet replacement as we look out, say, the next 12 months. Thank you.

Actually I'll turn that over to Ted to answer.

Yes, hello Michael. What we saw is a general mix of steel, open top hoppers, gondolas and flat cars other than the rebuild that you mentioned. So a pretty broad look when you take a look at what we've got. We're seeing a broad mix of everything coming in right now albeit at lower volumes.

With respect to the Eastern coal demand, we continue to reiterate that there is still a significant replacement cycle that's left with the Eastern Class 1s and so that remains our focus as well.

And in terms of just what you're seeing so far in the fourth quarter, [where you just] continue to see an increase in end demand, have you seen anything picking back up in terms of be it automotive racks or anything on that front? Thanks.

Yes, we're not involved in automotive racks, so I withhold comment on that. But of the car types we are involved in, I would say that the inquiries are stable. They are the same as they were in the second quarter. We're still seeing some interest across these different car types and it still remains to be seen though what stays in our customers' CapEx plans for next year. We'll have more visibility on that in the first quarter, I believe.

Thank you.

Justin Long, Stephens.

Hi, guys. This is actually [Brian Tally] filling in for Justin today. Thanks for taking my questions and congrats on a strong quarter.

[Hi, Brian.]

So you've talked about your focus on growing the services business going forward. Could you provide any color on how those efforts are progressing and what's a realistic timeframe for us to expect some of these strategic efforts begin to materialize?

Hello, Brian. This is Joe. I'll handle that. In terms of the strategic efforts, let me cover that and when we look at new product development we are actually seeing that that going on, the Shoals facility, startups on track, we're getting the production built out, we've got orders being built there now and we have orders to be build there next year. So that part of the strategy, yes, we're executing on.

In the services, what we continue to believe is, we like the improvements that we've made over the last year and those are bearing fruit as we saw year-to-date this year. I think we said on the last call that we want to make sure that those are sustainable so that we can take that model and then grow that. So that's still probably a year or two valid as we look at that.

Okay, that's helpful. And from the margin expansion that we saw in this quarter, if you take out the one-time carrying cost it looks like gross margins were actually 12.5%. I was just wondering was this mainly the result of the positive mix or if you could elaborate on that.

It really comes down to mix of the different car types that we build once you take out those carrying costs.

Okay. And as we think about your efforts to further penetrate, the non-coal markets for Shoals, do you already have designs for all car types outside of tank? I guess I'm just trying to understand which car types you could take an order for today and start building versus other car types where you may need more time allocated to R&D before you get to the point of accepting orders.

Yes, Brian, this is Ted. We've got a pretty solid design portfolio. There are a few other car types that we're looking at getting into that we're not into today. But I would say intermodal, we've got a few more things to do there, but we are ready for orders on intermodal. We are ready for orders on all the other miscellaneous open top, gondolas, hoppers et cetera.

That's all for me. Thanks for the time.

Thanks, Brian.

Steve Barger, KeyBanc Capital Markets.

Hello. This is actually Tejas filling in for Steve. How are you, guys?

Good, Tejas.

Just a couple of questions from me. In the past you've provided some detail on the rebuilds. Just out of curiosity what is expected life of a rebuilt car, is that less than the traditional new car?

I'll touch on that, Tejas. This rebuild essentially is going to allow you to extend a car to its original life. So if it's a 50-year car, you're essentially rebuilding it maybe in year 20 or year 30 to still get to that 50-year cycle.

Got it, got it. So I guess just a follow-up, when we see all these industry stats, the cars that are shown for 40-plus years does that include the rebuilds or are the rebuilds then falling back into the 20-year or whatever the number may be?

Yes, without getting into a lot of detail, the car will expire, if it was built before 1974, it will expire when it gets to 40 years of life. If it was built after 1974, it will expire when it gets to a 50-year life regardless of whether it was rebuilt or not.

It's not like the clock starts to -- the clock doesn't start over at the point in time at which it was rebuilt.

Got it, got it. And then just a question on Shoals facility. It seems like you guys had your first delivery out of that facility in the quarter. Can you just kind of talk about how that's progressing? Is that ahead of plan, is that at plan or a little behind?

This is Joe. We are on track, as I said. We've got the one production line now. Our initial orders are just about complete and ready to be shipped. There was no shipments in the quarter out of the facility. But in terms of building it out, staffing, getting people trained, we like where we're at, we are on track.

Got it. And then just lastly, it seems like you guys have a lot of liquidity, I think about $180 million, if you include the credit facilities and the cash. Any idea on -- any thoughts on the packing order of how you may choose to deploy that?

Yes, we've been pretty consistent as we look at, our business being a cyclical rail business, where we're at in the execution of our strategic priorities, we're going to maintain a conservative balance sheet and a strong cash position.

Got it. Thanks, guys.

(Operator Instructions) Barry Haimes, Sage Asset Management.

Thanks very much. I had a question related to all of the non-coal car types. What's the right way to think about -- what sort of annual volumes you need to breakeven on that activity, so ex corporate overhead, ex coal, if you are just looking at all the relatively new car types or the non-coal car types, what is the right way to think about given Shoals et cetera, what sort of breakeven units do you need [to make]? Thanks.

Barry, this is Joe. We don't give out that kind of level of details. What we kind of guide people to is go back and look at our history at the different volumes. Given a cyclical business, you'll see our volumes go up and down, you can see what kind of profitability the business produces that differ any given volume.

Okay, just one quick follow-up, given that historically [you've been] largely coal. If we're looking at gross or operating margins across history, what's the right way to think about the margin profile of the new car types versus the traditional coal cars?

Good question, Barry. We've looked at this and I think we have (inaudible) in past. When we look at the Shoals facility, we expect that given the efficiencies there but with the car types you plan to build there that margins should be consistent with history as old car types are a little different than the coal cars where we had a market dominant position.

Okay, thanks.

Thank you.

Michael Gallo, CL King.

Hi. Good morning. Just a couple of follow-up questions. How much you expect in startup costs related to Shoals in the fourth quarter?

Say that again, Mike.

How much do you expect in startup cost related to Shoals in the fourth quarter?

No, we're still going to be in the startup mode in terms of the costs that go through. Although as we continue to ramp up, we should get both of these some improvements and the efficiency and better utilization of that overhead capacity there. So there is still going to be a cost going through, but it's probably going to be at slightly lower levels than we saw in the third quarter.

Okay. And how much more CapEx do you think you have spend to get Shoals fully up and going?

We're still thinking it's in that $23 million range. This year we should be somewhere in the high-teens with the rest going over into 2014.

And how much has been spent through the first three quarters?

We spent about $16 million in CapEx for the first three quarters. Most of that is from Shoals.

Okay. So, probably a couple more in Q4.

Yes.

Okay. Thank you.

You are welcome.

And at this time we have no further questions in queue.

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 800-475-6701, pass code 306164. Good day.