FreightCar America Inc (RAIL) 2015 Q2 法說會逐字稿

Welcome to FreightCar America's Second 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 September 6, 2015. To access the replay, please dial 1800-475-6701.

The replay passcode is 365415. An audio replay of the call will be available on the Company's website within 2 days following the earnings call.

I would now like to turn the call over to our Chief Financial Officer of FreightCar America Mr. Chip Avery. Please go ahead, sir.

Thank you. And welcome to FreightCar America's second quarter 2015 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, 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 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 2014 Form 10-K and earnings release for the second 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. I'm pleased that we delivered much improved results in the second quarter. A number of factors contributed to the improvement, including delivering the highest level of railcars since the second quarter of 2012, improved manufacturing and productivity at all of our facilities, including our Shoals facility and a favorable product mix. Our revenues and operating margins were significantly higher year-over-year and sequentially which yielded earnings per share of $0.60 for the quarter.

During the second quarter, we made meaningful operational strides at Shoals, which led to improved manufacturing efficiencies. As planned, the additional production line at our Shoals facility became operational and the productivity of our employees there continues to improve. While we are pleased with the progress we've made to-date, we still have areas for further improvement, and we'll continue to make investments to improve productivity through continued training, technology enhancements and automation as part of our broad railcar product portfolio.

Looking forward, the success of our diversification strategy has allowed us to build and maintain a strong backlog despite the continued decline in coal, which Ted, will speak to you shortly. Our backlog is at 14,000 railcars, which is 5,500 railcars higher than this time last year. More importantly, 86% of this backlog or about 12,000 railcars represents non-coal cars, which a year ago only accounted for 56% of our backlog or about 4,800 railcars. Given our improved visibility for production of the remaining five months of 2015, we now expect full-year delivery to be approximately 9,500 railcars.

Meanwhile, our services business continued its strong performance in the second quarter and we continue to see steady volumes of maintenance and repair work with a healthy backlog of program work for the remainder of the year. Ted, will now give you an update on our markets and commercial activities.

Thank you, Joe. To recap, order activity for the period 1,618 railcars of various types were ordered in the second quarter of 2015, all of which were new cars. It also included our first order for plastic pellet covered hopper cars, which continues our strategy of diversifying our railcar product portfolio. Order levels this quarter compared to 2,401 units ordered in the second quarter of 2014 and 1,336 units ordered in the first quarter of 2015. Deliveries for the second quarter of 2015 totaled 2,611 railcars, which included 1,861 new and 750 rebuilt railcars. This compares to 1,635 railcars delivered in the same quarter of 2014, which included 510 new, 325 leased and 800 rebuilt railcars. There were 1,059 railcars delivered in the first quarter of 2015, of which 651 were new and 408 were rebuilds.

As Joe mentioned, our order backlog at June 30, 2015 was 14,075 railcars with a sales value of approximately $1.26 billion, which is up from 8,493 railcars at June 30, 2014 and compares to 15,068 railcars at March 31, 2015. Industry wide, 19,786 units were ordered and 21,567 units were delivered during the second quarter of 2014. While order levels are below those of the same period in the prior year, they are above first quarter order amounts. Tank car orders as a percentage of total orders were only 16%, while covered hoppers accounted for 47% of total orders which demonstrates there is still relatively strong demand for covered hopper cars, particularly those of medium and large cube capacity.

Industry wide backlog was 135,805 units at the end of June, down 5% from the record high at the end of December 2014, but still representing over six quarters of backlog at current delivery rates. Commodity loadings on US railroads in the second quarter of 2015 were down 7.4% when compared to the second quarter of 2014. Coal, grain, metallic ores, crushed stone, sand and gravel all weakened year-over-year. Intermodal container loadings continued their strong growth, increasing by 5.4% in the second quarter from year ago levels.

The coal market continues to weaken. As of the end of May, utility coal stockpiles increased to 175 million tons, which is 28% above May 2014 levels and 6% higher than previous 10-year averages for May. US coal production in the first half of 2015 was down 9% versus the same period in 2014, while US coal exports are expected to show a decrease of 20% in full year 2015 versus 2014.

As a result of the continued pressure on coal, loadings fell 15.5% from the second quarter versus the same quarter of 2014. These factors coupled with improved rail velocities caused significant increase in coal cars in storage to approximately 27,000 coal cars at the end of the second quarter of 2015. This compares to approximately 5,000 units in storage at the end of the second quarter of 2014 and approximately 18,000 units at the end of the first quarter of 2015. Given all of these factors and with ongoing pressure from natural gas. We continue to believe that there will not be any meaningful orders for coal cars in the foreseeable future. Now I would like to turn the call over to Chip to address our second quarter financial results.

Thank you, [Ted]. For the second quarter of 2015 consolidated revenues were $235.6 million compared to $139.7 million in the first quarter of 2014 and $92.8 million in the first quarter of 2015.

Net income for the second quarter of 2015 was $7.4 million or a $0.60 per diluted share. The highest level of quarterly EPS in the last 11 quarters. These results compared to net income of $1.6 million or $0.13 per diluted share for the second 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. Manufacturing segment revenues for the second quarter of 2015 were $227 million compared to $128.8 million in the second quarter of 2014 and $85.1 million in the first quarter of 2015.

Manufacturing segment operating income for the second quarter of 2015 was $17.2 million compared to $7.4 million in the second quarter of last year and $1.9 million in the first quarter of 2015.

The start-up costs associated with the capacity expansion at Shoals were $900,000 and $1.4 million in the second and first quarters of 2015 respectively. These costs are primarily associated with the hiring and training of new employees, as well as certain facility related expenses.

The services segment had revenues of $8.6 million in the second quarter of 2015, compared to $10.9 million in the second quarter of 2014 and $7.7 million in the first quarter of 2015. The services segment operating income was $1.5 million in the second quarter of 2015, compared to $1 million in the second quarter of last year and $1.2 million in the first quarter of 2015. The increase in operating income, both year-over-year and sequentially reflects a favorable mix of program work and target sales.

Corporate costs for the second quarter of 2015 were $7.8 million compared to $6 million in the second quarter of 2014 and $6.2 million in the first quarter of 2015.

The increase in corporate costs on a sequential basis was driven primarily by second quarter legal and consulting costs.

Turning to our balance sheet, our financial position remained strong with no outstanding debt and $76 million in cash and short-term investments at June 30, 2015. The decrease in cash and investments from $168 million at the end of 2014 was driven primarily by an increase in inventory to support production requirements and utilization of a customer deposit.

At June 30, 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. Capital spending for the second quarter of 2015 was $6.3 million of which $4.4 million related to the Shoals facility. For the full year of 2015, we continue to expect capital expenditures to be approximately $15 million including amounts already spent.

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

Thanks, Chip. While we are pleased with the operating improvements that the team has made in the second quarter, we continue to be focused on driving further improvements. As Ted indicated, industry orders, backlog and deliveries remained strong as compared to historical averages. But we are ever mindful that we are in a cyclical industry and are carefully watching trends in the energy markets and railcar loading for developments that could impact our business. However, we're confident that our diverse railcar offering, efficient manufacturing facilities and talented team will allow us to effectively compete throughout the cycle, which over the long term will drive increasing value for our customers, shareholders and employees.

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

(Operator Instructions) Michael Gallo, CL King.

Hi, good morning. Congratulations on the improvement.

Thanks, Michael.

Just a couple questions. I was wondering if you could speak to what car areas you're currently seeing some strength, obviously there has been some areas, certainly that there's been weakness. I was just wondering if you could speak to where you see strength to start? Thanks.

Hi, Michael. It's Ted. I would say that two general categories of strength are intermodal and automotive products. Obviously we play in the Intermodal space. Aside from that, we -- obviously the railroads are showing weak traffic in every other commodity category, but from our standpoint enquiry levels have remained fairly steady over the past few quarters. So it hasn't -- from our standpoint, we're still receiving enquiries for a broad base of car types.

And Mike, I think as Ted said, when you look at the orders for the quarter, which are actually from a [cycle] level still pretty good, 47% of those were in covered hoppers. So, in those medium and large covered hoppers still seem to have some demand out there.

And I think you mentioned those are to go on plastic pellet, is that right?

Yes. Based on the larger -- the larger cube cars usually tend to go on plastic pellets.

All right. Okay, great and then second question I have is just can you update us on the expansion at Shoal, sounds like it was on plan. I know you also mentioned in your prepared remarks that you thought there was still some room to garner some efficiencies at Shoal. So I was wondering if you could update us on what we should expect in the back half, obviously you have a good margin, but it seems like at least per your 9,500 unit guidance that we should actually see an uptick in shipments in the back half? (multiple speakers) Thanks.

Let me try to hit a couple of those points that are in there, Michael. In terms of the Shoal's, the production line did come on line. That line is in start-ups. We have production and as you look at the number of people we've hired since beginning of the year, those groups of people are still learning and gaining experience. So, we do expect them to become more productive as the year goes on. In terms of delivery cadence, again, I think we're pretty comfortable with the 9,500 cars delivered throughout the rest of this -- for the full year with the third quarter probably being a little bit higher on deliveries only because you got the holidays in the fourth quarter.

Thank you.

Justin Long, Stephens.

Thanks and congrats on the quarter guys. So, as we think about your gross margins, you know, we saw an uptick here in the second quarter. I know there's several moving pieces with Shoals costs, production ramping, changes in mix and I know you don't give specific guidance, but generally speaking, is the second quarter a good margin run rate to think about as we look out over the next few quarters or are any of those items that I mentioned you know going to cause a sequential move that's meaningful in either direction?

Yes, so Justin its Chip. As you mentioned, we don't give specific guidance, but a couple of factors, the experience that Joe mentioned in terms of the workforce and productivity should be positive. We have obviously good line of sight in terms of deliveries, so the delivery volume is up, you know somewhat in the second and third quarter versus the second -- I'm sorry, the third and fourth quarter versus the second quarter. So again we'll get more operating leverage from that perspective .So, I think we'll see a move up in terms of a very meaningful jump-up, we're looking at some moderate increases, but not significant from my -- from our perspective.

Okay, great that's helpful, Chip. I'm just curious with the new capacity at Shoals. Have you started to see any repeat customers? Have you had customers that took delivery of an initial order, were pleased with the production, and then they're coming back and placing a second order?

Yes, we have.

Okay. And it might be helpful, too. You mentioned several of the car types that have been in the order book, but could you just review all of the different car types you've successfully built and delivered at Shoals thus far?

Justin its Ted, we're not going to get into a plant by plant list of car types that we've got, we've delivered and that of course that are in our backlog. But I'll just say this, if you look at the six broad categories that the rail supply Institute puts out and one of which includes tanks and as you know, we don't participate in tanks. We've got five out of the six categories in our backlog and those are our spaced between Shoals, Roanoke and Danville.

Okay. Thanks Ted and one last one if I could squeeze it in. You mentioned the coal market and we continue to see a deterioration, have you thought about strategic options for further diversification in the business beyond just what you're doing at Shoals whether it's a services acquisition, growing the lease fleet, some other avenue. I'm just curious if you're actively evaluating some of those options given the current environment?

Hi Justin, this is Joe. Again, we look at all options to continue to grow the business and increase shareholder value. As you know the near-term focus has really been here is working on the diversification and getting that complete and then getting Shoal to a productivity level that we like.

Okay, fair enough. I'll leave it at that. Thanks for the time guys.

Mike Baudendistel, Stifel.

Thank you. You mentioned that your -- increase in capacity at Shoals is roughly complete. Can you quantify just what the capacity is or maybe give a range because I realize there is mix issues?

Yes, so what we have disclosed and you qualified the first one mix issues, changeover, startups, a lot of different factors. Again it's Chip here Michael. We've publicly stated that the capacity on a normal basis is between 6,000 and 8,000 units per year on an annualized basis at the Shoals facility and so. Again, there's a lot of factors that would dictate the utilization though.

Okay. And the plastic pellet car order was encouraging. How long are your backlogs for covered hoppers because I noticed that a lot of your competitors have long backlogs and may be they couldn't get those cars to customers quickly?

Hi Mike, it's Ted. In general again, we're not going to get into plant by plant detail. We obviously don't disclose that, but in general the covered hopper car backlog stretches into 2017, there may be some opportunistic space before then. But in general, it goes out to 2017.

Okay. That's helpful. And I guess just looking at the industry data the number of orders in there for steel open top hoppers and gondolas. Can you give us a sense, I know you don't give too much detail on your orders, but did you get you fair share of those orders because it seems like those would be in your (inaudible).

Yes, absolutely, we received orders for just about every category of car type in the second quarter.

Okay great. And the last one from me, was a little bit surprised of the corporate costs and you said legal and consulting costs. Could you just explain exactly why that was?

Yes, in terms of the legal there's two matters, the ongoing post retirement litigation that we're engaged in. So that's the portion of it. Another one we have a patent, a lawsuit that that came up in the second quarter that we are in the process of defending. So, those are the two sort of discrete items that we're going to talk about in terms of the quarter-over-quarter. The timing in terms of predicting those numbers in subsequent quarters frankly is pretty tough at this point of time.

Okay. And who is the plaintiff on the patent lawsuit?

National Fuel Car.

Okay. That's all for me. Thank you.

(Operator instructions) And ladies and gentlemen of the panel there are no further questions in queue at this time.

This concludes today's conference call. Thank you for joining. A replay of this call will be available beginning at 1:00 PM today at 1800-475-6701, pass code 365415. Good day.