FreightCar America Inc (RAIL) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FreightCar America's first quarter 2015 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 this conference is being recorded. An audio replay of the conference call will be available from 1:00 PM Eastern Time today until 11:59 PM Eastern Time on June 5, 2015. To access the replay, please dial 800-475-6701. The replay passcode is 358490. 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 Mr. Chip Avery, Chief Financial Officer of FreightCar America. Please go ahead.

Thank you, and welcome to FreightCar America's first quarter 2015 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 2014 Form 10-K for a description of certain business risks, some of which may be out 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 2014 Form 10-K and earnings release for the first quarter of 2015 are posted on the Company's website at freightcaramerica.com.

Let me now turn the call over to Joe McNeely.

Thank you, Chip, and good morning, everyone. As indicated in our earnings release yesterday, our first quarter deliveries, revenues and profitability were adversely affected by a number of items, including a series of production line changeovers and related inefficiencies, other manufacturing inefficiencies primarily at our Shoals facility, and weather disruption.

The manufacturing inefficiencies results from several factors, including material-related supply and quality issues, disruptions related to the expansion activity at the Shoals, and lower productivity from our less experienced workforce at the Shoals, and the impact of a complex order that was in process throughout most of the quarter. We are aggressively addressing these inefficiencies, and we continue to expect our full-year 2015 deliveries to be between 9000 and 10,000 railcars.

Looking forward, we have a strong backlog of over 15,000 railcars. With the success of our product diversification strategy, over 80% of the backlog is comprised of non-coal cars, whereas the backlog of non-coal cars at this time a year ago was under 40%. We continue to make strategic investments in our Shoals facility to fulfill this more diverse versus backlog. During the quarter, we added approximately 150 employees, and as I mentioned previously, we are continuing with the capacity expansion efforts that will be operational this summer.

Finally, our services business continues to perform well. We have a solid backlog of program work for much of 2015 and continue to experience a steady level of customer inquiries for our service offerings.

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

Thank you, Joe. We saw continued broad interest in freight cars in the first quarter of 2015 with 1336 railcars ordered, all of which were new cars. This compares to 1654 units ordered in the first quarter of 2014 and 3637 units ordered in the fourth quarter of 2014.

Deliveries for the first quarter of 2015 totaled 1059 railcars, which included 651 new and 408 rebuilt railcars. This compares to 753 railcars delivered in the same quarter of 2014, which included 363 new and 390 rebuilt railcars. There were 2360 railcars delivered in the fourth quarter of 2014, of which 1260 were new and 1100 were rebuilds.

As Joe mentioned, our order backlog at March 31, 2015, was 15,068 railcars, with a sales value of approximately $1.3 billion, which is up from 7727 railcars at March 31, 2014, and 14,791 railcars at December 31, 2014.

Industrywide, 15,952 units were ordered and 19,996 units were delivered during the first quarter of 2015. While these order levels are below those of recent quarters. Non-tank car orders as a percentage of total orders increased to 72% for the first quarter, with covered hoppers accounting for nearly three-fourths of the first quarter non-tank car orders. While there are signs of weakening demand for frac sand cars, there is still relatively strong demand for other covered hopper car types.

Industrywide, backlog was 138,856 units at the end of March, down 3% from the record high at the end of December 2014. 44% of this backlog consists of covered hoppers, while 38% is comprised of tank cars. Please note that these industry figures do not include orders, deliveries or backlog totals for rebuilt railcars.

Commodity loadings on the US railroads in the first quarter of 2015 were essentially flat when compared to the first quarter of 2014. Year over year, intermodal container loadings exhibited slight growth during the first quarter, while railcar loadings of metallic ores and crushed stone, sand and gravel each exhibited 8% or higher. Grain car loadings -- grain loadings, rather, grew by 10%.

The coal market continues to be challenging. As of the end of February, utility coal stockpiles increased to 150 million tons, which is 26% above February 2014 levels and 3% higher than the previous ten-year average for February. US coal production in the first quarter was down 4% versus the same period in 2014, while US coal exports are expected to show a decrease of 14% in 2015 versus last year.

In addition, coal loadings fell 3.3% in the first quarter versus the same quarter of 2014. These factors coupled with the improved rail velocities caused a significant increase in coal cars in storage to approximately 18,000 coal cars at the end of the first quarter of 2015, compared to approximately 9000 units at the end of the first quarter of 2015 and approximately 6000 units at the end of last year. Given the many challenges coal faces, we continue to believe that there will not be any meaningful orders for coal cars in the near term.

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 2015, consolidated revenues were $92.8 million, compared to $56.1 million in the first quarter of 2014 and $212.5 million in the fourth quarter of 2014. The net loss for the first quarter of 2015 was $2.1 million, or a loss of $0.17 per diluted share. These results compare to a net loss of $6.9 million, or a loss of $0.58 per diluted share, for the first quarter of 2014. Net income for the fourth quarter of 2014 was $4.8 million, or $0.39 per diluted share.

Manufacturing segment revenues for the first quarter of 2015 were $85.1 million, compared to $48 million in the first quarter of 2014 and $204.5 million in the fourth quarter of 2014. Manufacturing segment operating income for the first quarter of 2015 was $1.9 million, compared to a $5 million operating loss in the first quarter of last year. Operating income for the manufacturing segment was $13.6 million in the fourth quarter of 2014.

As Joe stated in his opening remarks, manufacturing segment results for the first quarter of 2015 were negatively impacted by a number of factors. With an increase in the number of production line changeovers and start-ups in the first quarter of 2015, our delivery volumes for the quarter were lower when compared to the fourth quarter of 2014. Production inefficiencies primarily at the Shoals facility and weather disruptions also negatively impacted revenue and profitability for the quarter.

In addition, we incurred approximately $1.4 million in costs associated with the ramp up of the additional production line at Shoals. These costs are primarily associated with the hiring and training of new employees as well as certain facility-related expenses. We expect to incur a similar level of start-up costs associated with the Shoals expansion in the second quarter.

The services segment had revenues of $7.7 million in the first quarter of 2015, compared to $8.1 million in the first quarter of 2014 and $8 million in the fourth quarter of 2014. The services operating income was $1.2 million in the first quarter of 2015, compared to an operating loss of $300,000 in the first quarter of last year. Services segment operating income was $1.2 million in the fourth quarter of 2014.

Corporate costs for the first quarter of 2015 were $6.2 million, which was flat versus the first quarter of 2014 and favorable to corporate costs of $7.4 million in the fourth quarter of 2014. Corporate costs in the fourth quarter of 2014 included a non-cash pension settlement expense of $1 million that was recorded primarily in cost of sales. The effective tax rate was approximately 34% for the first quarter of 2015.

Turning to our balance sheet, our financial position remains strong with no outstanding debt and $96 million in cash and short-term investments at March 31, 2015. The decrease in cash and investments from $167.5 million at the end of 2014 was driven primarily by an increase in inventory to support production requirements as well as $24 million of finished railcars on-hand at March 31, 2015, for orders that will ship in the second quarter.

At March 31, 2015, we held 240 leased railcars with a book value of $16 million, compared to 345 railcars with a book value of $23 million at the end of 2014. During the first quarter of 2015, we recognized a gain of approximately $1.2 million on the sale of railcars available for lease. The lease fleet was 65% utilized at the end of the first quarter, with the available portion of the fleet being actively marketed.

Capital spending for the first quarter of 2015 was $4.3 million, of which $3.3 million related to the Shoals facility. For the full year of 2015, we continue to expect capital expenditures to be approximately $15 million. During the quarter, we also received a cash payment of $4.9 million for incentives from the State of Alabama related to the capital investment and employment levels at the Shoals facility.

At this point, I will turn the call over to Joe for concluding remarks.

Thanks, Chip. While the first quarter presented us with several short-term challenges, we are pleased to report that we are making good progress towards rectifying the production inefficiencies that we experienced in the first quarter.

Our production rates are up, our new staff is getting more experienced, we are staying ahead of supply issues, and we will have fewer line changeovers for the remainder of the year. As such, we are confident in our full-year delivery projections for 2015.

We are also confident in our long-term prospects. We will continue to make further investments in our diversification strategy, which, when coupled with our focus on improving our operational execution, will drive increased long-term shareholder value.

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

(Operator Instructions). Michael Gallo, C.L. King.

I was wondering if we could just parse out those issues a little bit further, and I was wondering kind of where you stand on each of them as we sit today in the second quarter. Would you expect some further spillover into Q2? I mean, you obviously remain confident in your delivery number, but I was wondering if that's very back end-loaded or whether you think there could be some catch-up in the second quarter. Thanks.

Mike, I'm going to let Chip kind of go through the parse a bit, and then I'll address some -- and Sean and I will address some of the -- where we stand on addressing those issues.

Okay, as you look at sort of the third quarter and fourth quarter run rate -- I'm going to start there in terms of sort of a unit reconciliation. We had talked about it in the fourth quarter. We anticipated a number of changeovers in the first quarter. We didn't, obviously, give number guidance, but that ended up being about 350 units in terms of a comparison against our -- call it our delivery run rate in the back half.

As I mentioned, we also -- in the comments -- have $24 million of finished goods. That's about 250 units. And we had anticipated that that would have delivered, but just in terms of the completion near the end of the quarter, we did carry these into Q2 in terms of delivery.

Joe mentioned -- we'll call it a complex order. This really ended up slowing down the changeover of one of our lines. It ended up costing us about 400 units in the quarter. So this was not anticipated as we came into the year, and frankly, Joe and Sean can talk a little bit about it. We can -- it's safe to say, though, that that is behind us. The order is completed, and the new changeover has taken place.

If we look at the other items, we did have weather, we did have some other inefficiencies that Joe mentioned, and that kind of gets you to the balance of our deliveries of 1059 units. So, again, that's really the breakdown as we look at it, Michael.

This is Joe. Again, if you look at right now, some of these are definitely behind us. The complex order is behind us, the weather delays are behind us, the high number of changeovers are behind us, and we're continuing to address some of the production issues.

Yes, several of the production issues. I mean, over the last several months, we've brought in 500 new employees. Obviously, we work very closely with them. We're investing in training of them, so as they -- as we progress throughout the year, we should see an improvement with the inefficiency -- or improving inefficiency. Obviously, as Joe commented, the weather-related -- I mean, that did cause several disruptions in the Shoals facility, which contributed to the lost production at that facility.

We're working extremely closely with our vendors also with any type of disruptions there. So I look -- a lot of these items that we faced in the first quarter should be behind us as we go forward through the year.

And you mentioned an issue around quality, I think, in the prepared remarks. I mean, is that part of the work through at this point as well?

Yes, those were specifically related to certain components and material that were for our orders, and we think we've got those addressed, but, again, that's something we look at and watch closely every day.

All right. Okay, thanks very much.

Justin Long, Stephens.

So as we think about the ramp at Shoals, can you provide any more color on the flexibility of the cost structure there? We have some nice visibility in the backlog right now, but as you've said before and we know, orders can be choppy. If we do get into a less robust order environment in 2016 and 2017, how quickly could you realign the cost structure at Shoals to better match demand?

Again, Justin, as you know, we don't give financial guidance. Shoals has a little bit higher fixed-cost structure than our existing facilities, so it has less kind of operating leverage to pull. But if our order book goes down to where we need to do something, we'll look at costs pretty closely.

Okay, that's helpful. And I was curious -- if you looked at the backlog for Shoals, how many different car types are in that backlog today? And as you think about adjusting production lines to accommodate different car types and some of these switchovers that are going on, is there any color you can provide on the length of the typical production run or order you're getting right now? Is it 50 units, 100 units, something bigger than that?

Hey, Justin, it's Ted. I think when you look at Shoals, similar to what we've told you in the past, we see a broad diversity of car types -- open-top hoppers, open-top gons, flat cars, both intermodal and non-intermodal and covered hoppers, even some box cars. So it's fairly diverse. We tend to put the heavily-welded cars in Shoals and the other car types in Roanoke or Danville.

And then with respect to your question on order size, obviously, with the strength in the industry as we've come along here, we've seen the order size increase as well.

Okay, that's helpful. And the last thing I wanted to ask about, with the coal market showing some signs of weakening -- and you gave a few numbers on that -- any plans to adjust your production levels at Danville or Roanoke? And also, along those lines, longer term, is what you've seen -- based on what we've seen in the coal environment year to date, is there anything that would change your opinion of the longer-term coal car replacement needs in the market, specifically in the East?

I'll take that one, Justin. This is Joe. In terms of the coal market, it definitely is -- if you look at what Ted has said before, it has got some weakness in it. In terms of our long-term outlook, no, I don't think it changes the overall replacement cycle. The timing of that, though, is always cloudy when they -- each railroad will order those cars.

In terms of how that impacts Danville and Roanoke, right now our backlog for the year is pretty full, and we've got backlog going out into mid next year. So at this point, we'll address that as we get through later parts of this year.

Okay, fair enough. I appreciate the time.

Matt Brooklier, Longbow Research.

So I had a question on the orders taken in the quarter, if you could maybe provide a little bit more color in terms of the composition of those orders, the types of cars that you received in 1Q.

Sure. Matt, it's Ted. We received some orders for open-top hopper cars, steel, open-top gondolas, also steel, and non-intermodal flat cars.

Okay.

Obviously, all of the open-top hoppers and gons were of the non-coal variety.

Okay. And can you talk to -- I know it's kind of early, but talk to maybe inquiry activities thus far in 2Q?

Sure. We see the inquiry level as remaining broad-based and relatively strong, but it's difficult to predict if those inquiries will turn into orders, as you know. There are some car types that are weaker than others, but on the whole, we still think it's a relatively strong inquiry level.

Okay. And then just with Friday's announcement from (inaudible) in terms of the final rule for flammable tank cars and transportation, I'm just trying to get a sense as to how you see yourselves positioned in the market -- realizing you obviously don't build tank cars, but I'm trying to see if there's any potential benefit given your competitors are going to be quite busy with doing a lot of replacement orders and also retrofits.

Sure. Well, first and foremost, it was good to see that the USDOT and Transport Canada came together to provide the final ruling for the safe transport of these flammable liquids by rail. As you all have probably seen, the ruling addresses a number of different safety improvements -- car design, both new and existing tank car design, enhanced tank car braking, reduced operating speeds on the railroads, other improvements relating to rail traffic routing, et cetera.

And while FreightCar is not directly involved in the manufacture or repair of these cars, as you pointed out, we continue to analyze the ruling and we stand prepared to address its future impacts to the non-tank car production and repair capacity as well as the broader impact of the ruling on our industry in general.

Okay. Appreciate the color.

Doug Dyer, Heartland Advisors.

Since you've discussed some of the finished inventory that will come into Q2 that was the finished cars, can you discuss the length of time it will take for the inventory that you've got on hand now to be converted into finished units and cash as we're looking at Q3? Can we start to see some of that come in then?

It's Chip. The cycle is very fast in terms of the pay cycle. What you see is the conversion of the $24 million of finished goods has already taken place. With the significant number of start-ups in the first quarter, we had a lot of material that was staged up, and you see a -- you'll see a large increase as we break down and finish the raw and WIP and finished goods in our queue, but we had a very large slug of raw material and WIP that was really just staged and ready for the orders and the production through Q2.

So we don't give guidance on the levels, but I would expect the overall levels to come down fairly significantly as those lines get up to speed and start consuming and then start slowing. So, again, the normal delivery and collection cycle is fast. The bigger one is just -- is drawing down inventory after the production starts up.

Doug, this is Joe. I think what we've talked about in the past is you have to be careful with trying to target any kind of working capital what with -- just given timing of inventory purchases. Since we've got these orders, sometimes we'll pre-buy stuff ahead of time, and so you've got to be careful kind of quarter in, quarter out on working capital levels.

The order -- again, the inventory was purchased for specific orders and specific production jobs, so, again, it is out there and it's tagged to an order, so it ultimately does get converted. It's just, as Joe said, the timing is a little tricky on a quarter-by-quarter basis.

All right. And maintaining your delivery number for the year, that would imply a pretty healthy cadence or an exit rate number in Q4?

It does, and we typically are -- as you look back in history, we do have a tendency to draw down with the production at year end. And with the Shoals line coming onstream mid-year, we do see the delivery cadence at a higher rate. Again, we're not taking the balance, if you will, of the 9000 to 10,000 by quarter, but it's safe to say that the back half is higher just with respect to the Shoals line coming up.

Thank you.

(Operator Instructions). Mike Battistelli, Stifel.

I think you said that 65% of the lease cars are now utilized. Can you just remind us of what car types those are mostly? Is it a lot of coal cars?

Well, there are just a couple hundred of them, so we're really talking about a small universe, and they're both -- one is coal and one is non-coal hoppers.

Okay. And then just with respect to the inefficiencies from the new employees, how long does it typically take for the new employees to get fully ramped up, where they're just as productive as longer-term employees?

That's a hard number to peg in terms. Again, we're working with them closely. We're investing in training and welding to get them up to where we want them to be, knowing that a workforce of 500 hired over the last year and a half is not going to be as productive as a ten-year-old workforce, but that's something that Sean and his team are working closely on day in and day out.

Okay, thanks. That's all the outstanding questions I had.

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

All right, thanks. 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 1-800-475-6701, passcode 358490. Good day.