FreightCar America Inc (RAIL) 2014 Q1 法說會逐字稿

Welcome to FreightCar America's first-quarter 2014 earnings conference call and webcast. At this time, all participant lines are in 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 1:00 p.m. Eastern Standard Time today until 11:59 p.m. Eastern Standard Time on June 5, 2014. To access the replay, please dial 1-800-475-6701. The replay pass code is 325496. An audio replay of the call will be available on the Company's website within two days following the earnings call.

I would now like to turn the call over to Chip Avery, Chief Financial Officer of FreightCar America.

Thank you. And welcome to FreightCar America's first-quarter 2014 earnings conference call and webcast. Joining me today are Joe McNeely, President and CEO; Ted Baun, Senior Vice President, Marketing and Sales; and Sean Hankinson, Vice President of Manufacturing Operations.

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 2013 Form 10-K for a description of certain business risks, some of which may be outside of 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 2013 Form 10-K and earnings release for the first quarter of 2014 are posted on the Company's website at freightcaramerica.com.

Let me now turn the call over to Joe McNeely.

Thank you, Chip. We had a disappointing start to 2014, with the harsh winter weather significantly impacting operations at all of our facilities. The inclement weather led to shutdowns at our plants for more than 20 shifts, and caused supply disruptions and production inefficiencies. This, combined with production line changeovers, resulted in railcar deliveries that were 30% lower than we had planned in the first quarter.

The severe winter weather also had a significant unfavorable impact on our Services segment. The harsh weather led to higher coal train utilization, which reduced the number of coal trains released for maintenance across the industry. This lowered volume to our shops and sales of repair parts. We do expect to rebound in repair and parts demand as the railroads improve their operating performance and coal trains become available for maintenance.

Our financial results for the quarter reflect these issues, and Chip will provide further details on that shortly. On a positive note, we received a significant order for new Eastern service coal cars during the quarter. Given Roanoke's backlog, this additional demand will necessitate resuming production at our Danville facility this summer in order to meet customer delivery requirements. Ted will discuss the railcar and coal industries in more detail, along with the dynamics of the Eastern and Western coal car fleets, and the impact of the winter weather on the coal market.

For our Manufacturing segment, our product diversification strategy continues to progress as planned. We have a broad range of car types in our backlog, and the ramp-up at Shoals continues as scheduled. We are currently operating two production lines at Shoals, and will continue to invest in rounding out the production capabilities that will allow us to build a full range of freightcar types, including covered hoppers and intermodal railcars. Our backlog is strong, and increased to 7700 railcars at quarter-end, including nearly 2900 non-coal cars.

With Shoals becoming fully operational and the restart of Danville, we continue to expect to deliver around 7000 railcars this year. For the remainder of 2014, we are focused on executing our strategic priorities, which include continuing to diversify our railcar offerings, maintaining our coal car leadership position, drawing value from our services business, and maintaining a strong balance sheet.

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

Thank you, Joe. We have seen broad interest in freightcars in the first quarter of 2014, with 1650 more railcars ordered, 1500 of which were new coal cars. This compares to 274 units ordered in the first quarter of 2013, and 800 railcars ordered in the fourth quarter of 2013. First-quarter 2014 deliveries of 753 railcars included 363 new and 390 rebuilt railcars. 75 of the new railcar deliveries went to our JAIX leasing subsidiary. 1073 railcars were delivered in the first quarter of 2013, leaving 448 new cars and 625 rebuilt railcars. There were 1101 railcars delivered in the fourth quarter of 2013, of which 190 were new, 99 were used, and 812 were rebuilds.

As Joe mentioned, our order backlog at March 31, 2014 was 7727 railcars, which was up from 2082 railcars at March 31, 2013. Our backlog at December 31, 2013 was 6826 railcars. Industrywide, 24,050 units were ordered and 13,954 units were delivered in the first quarter of 2014. While total railcar orders were flat year-over-year, non-tank car demand improved significantly. The share of non-tank car orders increased from 20% to 80% when compared to the same period in 2013, with 19,281 ordered in the first quarter of 2014 compared to 4634 ordered in the first quarter of 2013. Non-tank car orders totaled 9949 units in the fourth quarter of 2013.

A majority of the first-quarter's orders were for covered hopper cars, with this car type accounting for 77% of non-tank car orders for the quarter. Deliveries were up 17% when compared to the same period in 2013, but deliveries for non-tank cars decreased from the 7336 units delivered in the fourth quarter. Industrywide backlog was 81,927 units at the end of March, up approximately 12% from the end of December. 61% of the current backlog consists of tank cars, while another 23% of the backlog is made up of covered hoppers. Please note that these industry figures do not include orders or deliveries for rebuilt railcars.

Commodity loadings on US railroads in the first quarter of 2014 were essentially flat when compared to the first quarter of 2013. Intermodal container loadings exhibited continued growth for the quarter, increasing by 3.2% versus the same quarter in 2013. While railcar loadings of certain commodities such as nonmetallic minerals, grain, grain mill products, and petroleum products exhibited growth, coal loadings remained relatively flat versus the first quarter of 2013.

The coal market continues to show mixed results. As of the end of February, utility coal stockpiles decreased to 119 million tons, 18% below the 10-year average level and 33% below February 2013 levels. Furthermore, in areas where coal competes as a fuel, total electricity generation through March 2014 was up 6% when compared to 2013. However, US coal production in the first quarter was down 1.2% versus 2013 levels, and US coal exports, while still trending above historical averages, are forecasted to decrease by 25% in 2014 versus the prior-year.

Lower railroad productivity and increased burn triggered by the cold winter led to decreased coal cars in storage as well as strengthening lease rates. We estimate that the number of coal cars in storage declined to about 9000 railcars at the end of the first quarter compared to 16,500 railcars at year-end. This is the lowest level since December of 2011. While there has been an uptick in demand for Western-style coal cars, to date, that demand has been met with existing equipment.

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

Thank you, Ted. For the first quarter of 2014, consolidated revenues were $56.1 million compared to $87.6 million in the first quarter of 2013. The net loss for the first quarter of 2014 was $6.9 million or a loss of $0.58 per diluted share. The net loss for the first quarter of 2013 was $2.6 million or $0.22 per diluted share.

Manufacturing segment revenues for the first quarter of 2014 were $48 million compared to $77.7 million in the first quarter of 2013. The year-over-year decrease in revenues reflects the lower number of cars delivered. The operating loss for the Manufacturing segment for the first quarter of 2014 was $5 million. Costs associated with the continued ramp-up of production volumes at our Shoals facility, and the carrying costs associated with the Danville facility, totaled $2.9 million in the quarter.

As Joe mentioned, the harsh winter also impacted operations in the form of lost production days and supply disruptions. We estimate the margin impact of the multiple weather-related production shutdowns, supply disruptions, and the related inefficiencies, to be $1.9 million for the quarter. The Manufacturing segment operating income was $2.1 million in the first quarter of last year, and was a loss of $8.7 million, including a $7.6 million impairment charge in the fourth quarter of 2013.

The Services segment had revenues of $8.1 million compared to revenues of $9.9 million in the first quarter of 2013, and $7.7 million in the fourth quarter of 2013. The operating loss for the Services segment was $340,000 in the first quarter of 2014. This compares to operating income of $1.3 million in the same period of the prior year and an operating loss of $2.4 million in the fourth quarter of 2013.

The fourth quarter operating loss included $1.9 million in pretax restructuring and impairment charges. The significant year-over-year decreases in revenues and earnings reflect lower repair volumes caused by increased utilization of trains, and a less profitable mix of part sales and repair services in the first quarter. Corporate costs for the first quarter of 2014 were $6.2 million compared to $2.8 million in the first quarter of 2013. Corporate costs for the first quarter of 2013 included a $3.4 million pretax net benefit resulting from a litigation settlement. The effective tax rate for the first quarter of 2014 was 41.1%.

Turning to our balance sheet, our financial position is strong, with no outstanding debt, and $143 million in cash and short-term investments at quarter-end. The decrease in cash and investments from $192 million at the end of 2013 was driven primarily by an increase in working capital, including a $26 million increase in inventory and inventory-on-lease, as well as funding of first-quarter operations. At March 31, 2014, we had 823 leased railcars with a book value of $62 million, compared to 748 railcars with a book value of $53 million at the end of 2013. The leased fleet was 100% utilized at the end of the first quarter.

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

(Operator Instructions). Michael Gallo, CL King.

A couple of questions. The production issues you cited in the first quarter, do those spill over at all into the second quarter? And are those completely behind you at this point?

There's a little bit of spillover, but now that the winter weather is behind us, and both our production and our suppliers are back up to speed, we shouldn't see what we saw in the first quarter.

So pretty much should we expect that the units you would've expected to ship in the first quarter probably ship in the second quarter?

Let me make sure of your question. Do you mean did they push out into the second quarter?

Yes.

Yes. That was just a delayed delivery on those.

Right. Okay. So I guess just to sort of frame it, as we start to get into the second quarter, really should get to more normalized and we should start to see normalized levels of deliveries based on your 7000 unit outlook? Or is there still some spillover and you wouldn't be more backend-loaded?

Well, we are definitely -- when you look at the year, then the second half is going to be, from a production and delivery standpoint, better than the first half, with Q3 being kind of the strongest quarter, given that Danville will be up and running by then. And Q3 doesn't have the holiday shutdowns that the Q4 has.

Right. Okay. Right. Okay, great. Second question just on the bookings. Obviously, nice coal car order. You're starting to see things come down in terms of cars in storage. You're restarting Danville. So help us a little with what you're seeing on the coal car side. It seems like the replacement cycle should kick in at some point, and then a lot of that stuff's been pushed out for a few years. Do you see just more potential replacement demand as we go forward? Or should we still expect to kind of lumpy and bumpy of seeing an order here and then might not see anything for some time?

Hey, Michael, it's Ted. I'll address that. We'll separate the market, like we've done in the past, between Eastern coal and Western coal-style coal cars. In the East, we still see the same level of replacement that we've talked about in the past over the next several years. Yes, that will still be lumpy as we move forward. But we still very much feel that that's going to continue.

On the Western coal demand, obviously, the cold winter, the service disruptions, higher natural gas prices -- that has all meant good things for absorbing the existing cars that were in service. Those have come a long way to come out of storage and back into service. So that's the necessary first step toward the Western coal market recovery. But we'll have to just see how long-term that is versus just the winter weather, trying to replenish from the harsh winter that we saw.

All right. Okay, thanks very much.

Justin Long, Stephens.

Could you talk a little bit more about the decision to reopen Danville? I was mainly curious, is that decision based on the backlog you have today and the coal car order you received this quarter? Or was that decision in light of future orders you anticipate, just given your conversations with customers?

Justin, you may remember, as we talked when we actually idled Danville, that it was going to remain available for coal car production. And we always look at placing orders where it makes the best overall sense in terms of current capacity, delivery requirements, cost, et cetera. And with the order that we received in the quarter, we definitely needed to restart Danville to be able to meet those delivery requirements for this year. Going forward, yes, we are still early into this year to know what next year looks like.

Okay. Fair enough. And will there be any costs associated with getting Danville kind of ramped up over the course of the next quarter or so? I think you said they start production in the third quarter? Is that right?

Yes. This is -- it's Chip, Justin. We are looking at a modest -- about a $500,000 startup cost in the second quarter, production starting sort of as we roll into Q3.

Okay, great. That's helpful. And then maybe one more. On the 2900 or so non-coal railcars in the backlog today, could you give some more color on the main car types represented in that amount? And also, I was curious if any of these cars are being exported outside of the US?

Sure. The backlog consists mainly of open top hoppers, open top gondolas, and some flat cars. And there are a few international orders in there as well. That's correct.

And some covered hoppers?

Yes. And covered hoppers. That's right.

Okay, great. And there's no way you guys can quantify the amount that you are exporting to other countries?

Yes, we don't usually give that level of detail on the backlog.

Okay, fair enough. I think that's all for me. I appreciate the time.

Thanks, Justin.

Sal Vitale, Sterne, Agee.

Just a quick clarification. You mentioned the cost associated with both the Shoals ramp-up and the Danville startup. Is that what you mentioned was -- amounted to $2.9 million during the quarter?

Oh, yes, that's correct.

Okay. And you said that the second-quarter Danville cost would be about $500,000?

Right. The startup costs.

So, how much of the $2.9 million -- I assume the Danville portion of the $2.9 million was probably less than 2Q's $500,000? Is that fair to assume?

Yes. That's -- yes.

Okay. So that was mostly Shoals then. So then how do we think about Shoals trending forward, I guess, 2Q, 3Q, and to the end of the year?

Well, I'll just -- what we've talked about with respect to the -- we'll call them the Shoals and Danville idle, we continue to see those taper down through midyear until the buildout is complete, and we get the volumes at Shoals to a higher-level. And again, some of the costs are training, some of the costs are the things that you see in a ramp-up. So, again, that's sort of our thought is continuing to taper through mid-year.

Okay. So we should see a -- without providing any numbers, you should see that $2.9 million being some number less than $2.9 million in 2Q, and then continuing to decline sequentially throughout the year?

That's correct.

Okay. That's helpful. Thank you.

Matt Brooklier, Longbow Research.

So just wanted to also clarify something. The decision to open or reopen the Danville plant, that is just based upon the 1500 orders that you received for new coal cars during 1Q?

Yes. I think as I mentioned, that was needed to be able to meet the delivery requirements.

Okay. I mean, should we think about Danville as just being able to produce 1500 cars in 2013 -- or sorry, in 2014, and then that number potentially moves up into 2015? Or are we expected to do more than 1500 cars at Danville this year? It just seems like a relatively low number to reopen that particular plant, when I think the total capacity there is roughly 5000, 6000 cars. So I'm just trying to get a sense for what additional orders and production we could see at Danville this year.

As I mentioned a little bit ago, as we look into next year, it's still -- we're early into this year to see how the order book looks for next year, and where all the orders are needed. I think you remember from last call, we said Roanoke was virtually full, and as we had some significant new orders, we would have to open up Danville. And that's what we did.

And in terms of the kind of the start-up, we've done this before at Danville and Roanoke, both of those facilities. We had very flexible operations there. In 2010, we were running about a half a production line. In 2011 -- by the end of 2011, we were running two full production lines. So we know how to start that facility up in pretty short order.

Okay. Are you able to talk to order activity thus far in 2Q specifically on the coal car side? And then also maybe talk a little bit, if you can, on the non-coal side. And specifically, what potential incremental market share you've gained for the Shoals facility.

Yes. We're not going to comment on specific orders that we received since the end of the quarter. But I think if you take a look at just the improving market conditions out there for non-tank cars in general, it's pretty widespread and it's fairly optimistic. And we expect to get our share of that.

Okay. And then, my final question. SG&A was up a good amount during the quarter. How should we think about that on a go-forward basis? I know there's some puts and takes with Danville coming back online, but if you have a sense for what that number potentially could look like this year, that would be helpful. Thanks.

You bet. Again, just to mention, we did have a almost $3.5 million benefit in the prior year because of litigation settlements. So that really suppressed the level of the SG&A. I would expect levels consistent with where we were in the first quarter of 2014, plus or minus.

Yes, I mean, if you look at the first quarter -- this is Joe -- from 2013 and you add that back in, we're pretty flat on the G&A front.

Okay, that's helpful. Thank you.

Doug Dyer, Heartland Advisors.

I'd like a little more elaboration on the inventory. Obviously, you had to have more inventory to handle orders. But where do you see inventory, let's say, six months out? And how long does it take to consume the additional inventory that you've added? And should we think of the current level as kind of being a normalized level, now that it looks like orders might be coming through on a more sustainable basis?

We are continuing to ramp up. It's Chip here, Doug. The challenge in answering that question at any given quarter-end is going to be where we are in releasing from finished goods into the customers. We are continuing to ramp up. Danville is coming up, so I expect an increase at that level. As you know, we buy inventory certain times forward to make sure that we're locking in material costs. So, again, I would expect it to continue to increase somewhat and then plateau.

So, Joe?

Yes. I think the only thing to add to that, Doug, is if you remember when we talked last quarter, we had received a significant customer deposit which we used to buy inventory. And that's some of what is sitting in the inventory at this level. And it's just that that will kind of burn down over time; but what we don't know is, what are other orders do we have to pre-buy on to put material? So, our inventory level at any kind of point in time can bounce up and down, just depending on where we are at in the billed cycle.

Okay. Well, we've got orders up and you are anticipating greater production going forward. Danville is opening up. You've mentioned improving conditions in the non-tank market. Where is there room to -- for things to get better? This feels pretty good right now.

No, I think your comments are right, Doug. The market looks favorable going forward. And I think from what we are seeing from our customers, they want to see how the restoration of service after the harsh winter weather has set everybody back, and how that affects demand going forward. But I think everybody feels that the -- everybody we're talking to feels that better days are ahead for the non-tank freightcar market.

All right. One last quick one. Can we expect backlog to continue to grow from here?

That's going to be a subject of where orders come in. And, Doug, as you know, you've been following us for a while; orders can be lumpy, especially on the coal cars. So that would just be a function of where orders are at, vis-a-vis our production.

All right. Thank you very much.

Thank you.

Sal Vitale, Sterne, Agee.

Hi, Joe, just a quick question. So, on the deliveries guidance, you kept that flat at 7000 for the year. How do I think about, I guess, the timing of the deliveries of the new orders that you received? So the 1600 orders you received during the quarter, should we expect them to be, say, back-half of 2014 or early 2015? And then I guess the follow-up to that would be, in your original guidance that you gave on the fourth-quarter call was -- were you contemplating sort of 1500-plus orders for new coal cars?

Well, let me take the first one. That order is split in the back-half of 2014 and carry over into next year. And in terms of the kind of the guidance on the fourth-quarter call, I mean there were a number of kind of placeholder orders in there of different car types, not necessarily this one specific.

Okay. And then the -- just a follow-up question for that is -- and I understand you don't provide any pricing details, but just directionally, can you give a sense for the pricing on this new coal car order that you received? Is it directionally up from the last coal car order you -- last new coal car order you received?

Sal, you were correct in that we are not going to comment on that.

Okay. Thank you very much.

Thank you, Sal.

Mike Baudendistel, Stifel.

Just wanted to ask on the intermodal cars. I don't think that was one of the car types you mentioned for orders in the quarter. I just wanted to get any comments you have on sort of the outlook for that area.

Sure. There were no intermodal orders in the quarter, you're correct. We are pursuing several promising inquiries going forward, though.

Great. That's all for me.

And 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 1:00 p.m. Eastern Time today at 800-475-6701, pass code 325496. Good day.

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