FreightCar America Inc (RAIL) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to FreightCar America's third quarter 2014 earnings conference call and webcast. (Operator Instructions) Please note that this conference is being recorded. An audio replay of the conference call will be available from 1PM Eastern Time today until 11.

59 Eastern time November 30th, 2014. To access the replay please dial (800)475-6701. The replay pass code is 339904. An audio replay of the call will be available on the Company's web site within two days following this earnings call. I would now like to turn the call over to Mr. Chip Avery, Chief Financial Officer of FreightCar America.

Thank you and welcome to FreightCar America's third quarter 2014 earnings conference call and webcast. Joining me today are Joe McNeely, President and CEO, Ted Baun, Senior Vice President of Marketing and Sales, and Sean Hankinson, Vice President, 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 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 third 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, Jeff. We're pleased with the Company's continued improvement. Strong market conditions and our diversification strategy have led to record orders for 7,375 rail cars in the quarter, raising our backlog to over 13,500 rail cars at the end of September. More importantly, our backlog includes over 8,900 non-coal cars including our first orders for (inaudible) covered hoppers, and boxcars to be built at our Shoals facility. While we continue to expect 2014 deliveries to approximate 7,000 rail cars the strong order activity will help us increase 2015 expected deliveries to between 9,000 and 10,000 rail cars.

To support this growth we will invest an additional production capacity at our Shoals facility. The new capacity will allow us to capture current and projected demand, and is expected to be online during the second quarter of 2015. The total capital we expect to invest for the expansion will be approximately $10 million. Our services business has a solid backlog of program work as we finish 2014 and move into 2015. However, the high utilization of coal cars continues to reduce the number of trains released for routine maintenance. This high utilization continues to unfavorably impact volume to our repair shops and sales of repair parts.

Lastly, we completed the sale of our previously closed repair shop in Clinton, Indiana (inaudible) buyer, generating a pre-tax gain of $1.1 million. Ted will now give you an update on our markets and commercial activities.

Thank you, Joe. The broad interest in freight cars that we saw in Q2 accelerated in the third quarter as we received orders for 7,375 rail cars of which 2,210 were rebuilds. This compares to 6,001 units ordered in the third quarter of 2013 and 2,401 units ordered in the second quarter of 2014. Deliveries for the third quarter totaled 2,354 rail cars, which included 1,554 new and 800 rebuilt rail cars. This compares to 937 rail cars delivered in the same quarter of 2013, which included 194 new and 743 rebuilt rail cars.

There were 1,635 rail cars delivered in the second quarter of this year, of which 835 were new and 800 were rebuilds. As Joe mentioned our order backlog at September 30, 2014 was 13,514 rail cars with estimated sales value of $1.1 billion, which was up from 7,129 rail cars at September 30, 2013. Our backlog at June 30, 2014 was 8,493 rail cars. Industry wide a record 42,900 units were ordered and 18,432 units were delivered during the third quarter of 2014. These were significant increases over the same period of the prior year, in which 12,753 units were ordered and 12,647 units were delivered.

Over that time frame, industry wide non-tank car orders as a percentage of total orders increased from 60% to 81%, with covered hoppers accounting for 68% of third quarter non-tank car orders. We expect this general interest in a wide variety of non-tank cars to continue. The strong order activity increased the industry wide backlog to 124,437 units at the end of September 2014, off approximately 25% from the end of June, 2014. 43% of this backlog consists of covered hoppers, while 41% is comprised of tank cars. Please note that these industry figures do not include orders, deliveries, or backlog totals for rebuilt rail cars.

Commodity loadings on U.S. railroads also strengthened in the third quarter of 2014, and were up 4.1% when compared to the third quarter of 2013. Intermodal container loadings continued to grow during the third quarter, increasing 4.8% versus the same quarter in 2013. Rail car loadings of grain, lumber, metallic ores, and crushed stone, sand, and grave each exhibited growth of 11% or more versus the same prior year quarter. Coal loadings, however, decreased 2.5% versus the third quarter of 2013. Further on coal, utility stockpiles remain at relatively low levels while electricity demand has increased.

As of the end of August 2014, utility coal stockpiles decreased to 121 million tons or 51 days of consumption, which is 16% below the ten year average level and 22% below the August 2013 levels. Furthermore in areas where coal competes as a fuel, total electricity generation through September 2014 was up 1.2% when compared to the same period of 2013. Despite these factors the coal market continues to be challenging. U.S. coal production in the first nine months of 2014 was down about 1% versus the same period of 2013, and U.S. coal exports are forecasted to decrease 18% this year versus last year.

Relatively lower rail velocities and the need to replenish stockpiles has led to a decrease in the number of coal cars in storage to about 2,000 units at the end of September, compared to 5,000 rail cars at the end of June 2014, the lowest level of coal cars in storage since October 2011. However, while there has been an uptick in the utilization of existing coal car fleets, we do not believe these factors will result in meaningful orders for western style coal cars in the near-term. 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 2014, consolidated revenues were $190.3 million, compared to $75.9 million in the third quarter of 2013, and $139.7 million in the second quarter of 2014. Net income for the third quarter of 2014 was $6.4 million, or 53 cents per diluted share, and included a $1.1 million pre-tax gain, or $0.05 per share on an after-tax basis, related to the sale of the previously closed Clinton, Indiana repair shop. These results compare to a net loss of $900,000 or $0.08 cents per diluted share for the third quarter 2013, and net income of $1.6 million or $0.13 cents per diluted share for the second quarter of 2014.

Manufacturing segment revenues for the third quarter of 2014 were $181.5 million compared to $66.9 million in the third quarter of 2013, and $128.8 million in the second quarter of 2014. The year-over-year and sequential increases in revenues reflect a higher number of cars delivered to the market, particularly in the form of new cars, which increased by 1,360 units on a year-over-year basis, and 719 units on a sequential basis.

Operating income for the manufacturing segment for the third quarter of 2014 was $16.2 million, a significant improvement from $4.3 million in the third quarter of last year, and $7.4 million in the second quarter of this year. Services segment revenues were $8.8 million compared to $9 million in the third quarter of 2013, and $10.9 million in the second quarter of 2014. The decrease in revenue compared to the same period of the prior year reflects lower repair volumes, largely offset by higher parts sales. The sequential reduction in revenue primarily represents lower parts sales.

Operating income for this segment was $1.6 million in the third quarter of 2014, including the $1.1 million gain on the sale of the Clinton, Indiana repair shop. This compares to the -- to operating income of $700,000 in the same period of the prior year and $1 million in the second quarter of 2014.

Corporate costs for the third quarter of 2014 were $6.5 million, compared to $6 million in both the third quarter of 2013 and the second quarter of 2014. Turning to our balance sheet, our financial position remains strong with no outstanding debt, and $80.5 million in cash and short-term investments at quarter end. The reduction in cash versus the prior quarter was primarily driven by changes in working capital, associated with production volume increases and utilization of customer deposits.

At September 30th, 2014, we held 725 leased rail cars with a book value of $56 million compared to 700 freight rail cars with book value of $53 million at the end of 2013. The lease fleet was 100% utilized at the end of the third quarter. During the third quarter of 2014, we recognized a gain of $635,000 on the sale of rail cars available for lease.

This compares to a gain of $563,000 in the third quarter of 2013. Moving to capital expenditures, during the quarter we spent $2.6 million primarily for the purchase of equipment at our Shoals facility, which brings year-to-date total capital expenditure to $8.2 million. At this point I will turn the call over to Joe for concluding remarks.

Thank you, Chip. Our progress in bringing a number of new car types to market, the rapid start up of the Shoals facility, maintaining our coal car leadership position, improving our services operation, and retaining a strong balance sheet is attributable to the outstanding efforts of our employees and our supply chain partners and customer. Looking forward, we believe we are posed to capitalize on our diversification strategy and strong market fundamentals.

To be successful, we will need to actively manage the continued growth at our Shoals facility, as well as ensure that the strong market and resulting potential tightening supply of certain components does not impact our production rates. In closing I want to emphasize that we're focused on the execution of our future priorities, which I believe will drive increased value for our customers, employees, and shareholders. With that, we are ready to answer your questions.

(Operator Instructions) And first in line is Michael Gallo with C.L. King. Please go ahead.

Hi, good morning.

Morning Mike.

Congratulations on the diversification efforts paying off.

Thank you.

I wanted to delve in a little bit on the $10 million investment at Shoals. How much do you expect that will allow you to increase production at that facility? And also are there other opportunities to think about at Danville or other places where you might be able to increase your production of non-coal car types?

The $10 million is really to help us outfit another production line down there. Which will, again, depending on car types, add a couple of thousand to our production capacity there. Again, a lot of that depends on the actual (inaudible) that we put through there. Again, what we're seeing in the demand, and you see in some of the industry statistics is strong demand around intermodal cars and covered hoppers, things that aren't really situated well for Danville and Roanoke. They'll continue to be our focus for coal cars and other mechanically fastened cars.

Okay. And sort of as you get beyond these production line is there room to increase capacity further at Shoals at some point in time, if desired, or would that pretty much fill up what you can make out of Shoals?

I think any further increase in capacity where that physical build out or you know adding on second shifts, we would have on to take a really close look at the long-term demand there make sure we're comfortable that there's sustained demand there to add more money or invest in more people there.

All right. Great. Thanks very much.

Next we go to Justin Long with Stephens please go ahead.

Good morning, guys.

Morning, Justin.

This is actually Brian Colley on, taking the call for Justin today. But thanks for taking my question.

Thanks.

So you know, looking at your 2015 delivery guidance could you just talk about you know what this assumes for capacity utilization at Shoals?

I think from a Shoals standpoint 2015 today is -- we won't say sold out, there is some capacity that remains, but it's pretty full. There is some spots. We'll be adding to that capacity with additional capacity coming on line mid-year.

As far as production, you know, utilization, are you going to be -- do you think you could be at 80% production at Shoals by the end of 2015 or just -- if you give some sense of you know the production rate that would be helpful.

Yes, and Brian we don't give plant specific production rates and capacity utilization.

Okay. Well, so second question, on gross margins, they're about 10% in the quarter, and just wondering if this is a good approximation of what we should expect going forward or do you think ramping the build way -- build rate will allow for some additional operating leverage to start, you know, to push that number higher?

Yes, we -- Brian, it's Chip. We -- as you know we don't give forward guidance on our earnings. The unit volume you can see what we've said here. In terms of the fourth quarter a lot of it depends on the product mix going through the facilities, the change overs, holiday schedule and such. Again I mean, there's a lot of different factors that go into it, and at this point we're not commenting on our fourth quarter gross profit rates.

Okay. Fair enough. That is all the questions for me. Thanks for the time.

Thank you, Brian.

Next in line is Matt Brooklier with Longbow Research please go ahead.

Thanks and good morning. So a question on the 2015 guide if I just take the mid-point of what you guys outlined and I look at that on a quarterly basis, deliveries look about the same as what they were in third quarter, yet you know you're ramping up production at Shoals, Danville is now back on online. So I'm just curious as to you know if you are adding capacity next year, you know, why is the guidance suggesting that kind of the production that we did in the current quarter is kind of the run rate going forward, you know, are there mix issues? Is there some seasonality? Just trying to better understand your delivery guidance for next year.

Hello, Matt, this is Sean Hankinson. In response to that question, a lot of it is going to be dependent on product mix. As the Shoals facility comes online and other things -- other lines come up with the expansion, it's going to be [depending] on product mix with third quarter was [definitely a different] product mix than what we're going to be seeing going forward.

I think the other thing Matt also the product line change overs we have some -- we're finishing up long runs and as we look at next year we got a few more shorter runs and some change overs that will impact the numbers.

Okay. And then so you mentioned earlier coal car utilization is currently running at higher end levels, yet you don't see that as a positive for, you know, new coal car demand and I'm just trying to understand that dynamic, if we have higher utilization and congestion on the railroads I would think you you potentially would see some benefit there, yet you guys don't believe that that could drive new orders, moving out.

Yes, Matt it's Ted. You know, the railroads are pretty clear that they don't want to add equipment to solve the congestion problems, and all four major class ones in the U.S. have repeated that. That's really in line with our comment and why we say what we're saying.

Okay. And then just finally, you sold a -- sold a maintenance -- services facility in the quarter. Just given kind of the bigger picture decline and overall coal demand do you think you know potentially you need to shrink your network further at this point or do you think you right sized it?

I'm not going to comment specifically on that. The facility that we sold and we closed earlier in the year was one that wasn't in an optimal spot, we didn't make enough money, so from strategic standpoint we wanted to get out of that. We like our current repair network.

Okay. Appreciate the color.

And next we'll go to Sal Vitale with Sterne, Agee please go ahead.

Good morning, gentlemen. Do you hear me?

Yup. We got you.

So just quick question, just to follow up on the comments that were just made regarding the railroads being clear that they don't want to add more cars to deal with congestion issues. So how do you think about this longer term, this -- does the current situation -- does the railroad's current stance change your view on the rail -- on the coal car replacement cycle longer term or does it push it out? What's -- can you provide any color on that, please?

Yes, hey Sal. It Ted again here. You know, I think if you look at it dividing eastern coal, eastern railroads and the western railroads let's start with the east. They will continue to need to replace their aged fleet. Demand for orders in the near-term is a question mark for us. I think it gets pushed out a little bit. But when you look to the west, I do think that there's pressure with the broader use of natural gas and other things that is going to be very difficult for coal to -- coal cars to be ordered in the near-term. I think longer term we'll take a more conservative view on that.

Okay. It seems that your gamble paid off over the last couple years, diversifying into other car types given that -- given the delay in the -- you know, the continuation of the replacement cycle on the coal side. And then just one clarification, really. Joe, I think you said earlier that you're seeing strong demand for intermodal and covered hopper. Are there any other car types that have driven your recent increases in backlog?

Ted will answer that question.

Yes, products that are used in open top hoppers, open top mill guns, non-coal variety I think it's very broadly based, boxcars, covered hopper, mill gondolas, coil gondolas, flat cars, both intermodal and non-intermodal. We're seeing a broad interest in all of the freight car types.

Can you provide any color like within the covered hopper how much of those are sand cars?

As an industry?

Right, no. In terms of your orders. How many of the orders you received recently are specifically sand cars?

Sure, we're not going to provide any guidance on mix in our backlog or orders.

Okay. That's fine. And just the last comment, I think you said that the Danville and Roanoke facilities, you know, they are not well suited to intermodal and covered hopper and they're still geared towards coal car as or all they also geared towards other type of cars?

Mostly coal cars. They can produce certain other cars, [but it's primarily mechanically] (inaudible) stuff, not some of the welded car types like covered hoppers and flat cars. Those things are really going to be focus of the Shoals facility.

Given that you're not seeing a lot of demand for coal cars at this point is there any prospect of, say, reducing capacity at the Danville and Roanoke facilities at any point?

Right now we still got coal cars in the backlog and we're still building those and other car types that they can build. What happens as we go forward really depend on our future orders and where the backlog looks like they're going.

Okay. And just the last question, I know you didn't provide any margin guidance but directionally should we see any degradation over the next couple quarters just due to, you know, the capacity adds that you're undertaking?

It's Chip again. In terms of the margin, nothing forward, but your point is correct on the ramp up. As we start to build out the lines, hire employees and training we will see cost. It won't be as significant as sort of the overall facility that we saw during 2013 and kind of into 2014, but we will see some pressure probably over the next four months on the start up.

Okay. So it's fair to say that even looking at full year 20'15 that the margin should be back weighted, should be probably high in the second half of the year?

Yes. So the -- you know the capacity, that capacity will be online in the second half and will have been through that training period and sort of the non capital spending, as well, so again without -- all other things being equal, that's correct. Again, a lot of it just depends on what mix is in the back half, so specific to the ramp up that's what you would expect.

Okay. That's fair. Good job on diversifying away from coal. Goodbye.

Our next question is from Steve Barger with KeyBanc Capital go ahead.

Thank you good morning.

Hey Steve.

When Shoals was built I believe there were four lines in the facility, and I know it's very comprehensive from a process equipment standpoint. How many lines do you control now and can you be more specific on what the $10 million goes to?

Right now again, you're right, it was originally built as four production lines. We have three of those that will be operating. The $10 million is going to be really equipment, it's putting some of the infrastructure in to build the cars.

Okay. And do you have -- is it possible that you can get that fourth one or is that taken by somebody else?

Again, I think as I said, as we look at future, you know, capacity, expansion, it's really -- we got to look at the long-term markets, and whether you're really comfortable where we can commit to do anything, whether it's physical build-out or even adding more shifts, that we can sustain that, because it takes a lot to invest in people and plant, so we're real cautious about that.

Understood. And right now you're just operating one shift on three lines?

We won't comment on how many shifts we're running.

All right. And just so I'm clear, from a mix standpoint, I know you don't talk about specific mix, but you only build coal cars at Roanoke and Danville and only build a non-coal at Shoals, is that right, there will be no mixing?

You know, as we said Danville and Roanoke are predominantly coal cars or other mechanical (inaudible), there is other car types that we've built there in the past, aggregate cars and things that are similar, so that will still be the focus, and most of our new car types are going to go through Shoals.

Understood. Okay. Do you expect your inventory balance to increase significantly to meet demand here or do you think that $100 million, $110 million levels supports your anticipated production needs?

Yes, it's Chip. We don't expect a ramp up. A lot of this is quarter end timing. It did peak up a little bit here in the third quarter, but I don't anticipate having to add significant inventories to support the backlog.

So the majority of the material requirements are already reflected in the balance sheet?

Yes, that's correct. In terms of the forward, that's correct.

I'm just trying to get a sense for cash utilization going forward.

That's right, yes.

I guess last question, you've been in Shoals for a while now. What have you learned, what has been working better than you anticipated, what is maybe running slower, just how -- can you give us an update on your thought process on how that whole facility is operating for you?

I'll take that one. I think it's operating like we expected. In terms of within a year we've gone from, you know, a virtual start up to now producing on a couple lines with anticipated --adding another. So I think that's good. What we learned is the people down there are good and they work hard, our team has done a really good job of getting stuff implemented, that's there. And we are not in start up anymore, we're not at what we would say going to be long term efficiencies, which is kind of normal, about where we expect to be.

That's great. Thanks for the time.

You're welcome. Thanks Steve.

(Operator Instructions) And we on the line with Mike Baudendistel with Stifel.

Thanks. I wanted to ask you on some of these newer non-coal cars that you're building in Shoals. When you're in the marketplace maybe competing with someone that has a great deal more experience in those car types do you feel like you have to price the equipment more aggressively to win that business?

It depends on the car type, Mike. But all in all, I think that you know we've -- you know, depends on the mix and the car type, but I would say we do not have to price -- in some cases we do and in some cases we don't I guess is the best way to answer that.

One of the things to think of we've got a good reputation of building quality cars so that takes some of the question marks out that customers -- and again customers that we're selling to have been customers of ours for a long time so they know us pretty well.

Okay. And have you gotten feed back on the performance of those cars in the field and how has that been?

I think from a quality standpoint they're good. Again, these are long life assets, and again the cars that we built down there have only been in service a few months right now they're -- everything there seems to be about before we expect it to be.

Okay. Good. And just a follow up on the previous analyst question on inventory levels, increasing the second quarter, the third quarter. Is that more or less temporary and do you expect that to come down so we'll see the cash balance maybe come up at the end of the fourth quarter to a little bit closer to where it was earlier in the year?

We buy inventory for specific jobs, it's not -- everything that you see there is really either close to being online. It did come up a little bit. And again a lot of it just tends to be the timing of when, you know, the product shift -- we would like to continue to be as efficient as we can in inventory but we also have to make sure that the supply is there. So again, my hope is that it does come down a little bit in the fourth quarter. But again, it is -- it is specific, it is not speculative type, purchases if you will. So it's really just there to support the near-term production.

And maybe to your -- this is Joe -- to your cash question, we would (inaudible) expect cash to go up as receivables are collected and -- but a lot of it will depend on timing of buying inventory for future orders and delivery of rail cars and payments on receivables.

Great. Those are my questions. Thank you.

Thanks, Mike.

And at this time there are no further questions in queue.

Okay. This concludes today's conference call. Thank you for joining. A replay of this call will be available beginning at 1PM Eastern Time today at 1(800)475-6701 pass code 339904. Good day.