FreightCar America Inc (RAIL) 2015 Q3 法說會逐字稿

Welcome to FreightCar America's third-quarter 2015 earnings conference call and webcast. (Operator Instructions). Please note this conference is being recorded.

An audio replay of the conference call will be available from 1 p.m. Eastern time today until 11:59 p.m. Eastern time on December 3, 2015. To access the replay, please dial 800-475-6701. The replay passcode is 371914. 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 third-quarter 2015 earnings conference call and webcast. Joining me today are Joe McNeely, President and CEO, and Ted Baun, Senior Vice President Marketing and Sales.

I'd like to remind everyone that statements made during the 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 third 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 am pleased to report earnings for the third quarter increased significantly year-over-year and on a sequential basis. The increase reflects a higher number of railcars delivered, improved productivity within our manufacturing segment, and the gain on sale of our repair and maintenance services business. Excluding the gain on sales, third-quarter earnings per share of $0.96 marked the Company's highest quarterly earnings figures since 2008.

As previously announced, we completed the strategic sale of our railcar repair and maintenance services business to Appalachian Railcar Services for an aggregate purchase price of $20 million. We believe that this was an opportune time to exit this business given the strength of the railcar repair market and our desire to focus on growing our core railcar manufacturing parts and leasing operations.

Additionally, in August, we entered into a settlement agreement with the United Steelworkers Union and the former employees it represents in connection with a long-running dispute related to retiree medical and life insurance benefits. While the settlement agreement still needs final board approval, we believe that the settlement allows the former employees the ability to acquire health and life insurance coverage they need and removes a significant contingency from our books. Chip will provide further details in his comments.

Looking forward, we expect our full-year 2015 deliveries to be between 9,000 and 9,500 railcars. The Company is well-positioned with a backlog at just over 12,000 railcars, which consists almost exclusively of non-coal cars. Supported by orders in the backlog, we are planning on deliveries of between 7,000 and 8,000 railcars in 2016 and we do not see any meaningful coal car orders in the near-term to replace the coal car rebuilt program that's including this year.

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

Thank you, Joe. To recap order activity for the period, 1,008 railcars of various types were ordered in the third quarter 2015, all of which were new cars. Order levels this quarter compared to 7,375 units ordered in the third quarter of 2014 and 1,618 units ordered in the second quarter of 2015. Deliveries for the third quarter of 2015 totaled 2,846 railcars, which included 2,076 new and 770 rebuilt railcars. This compares to 2,354 railcars delivered in the same quarter of 2014, which included 1,554 new and 800 rebuilt railcars. There were 2,611 railcars delivered in the second quarter of 2015, of which 1,861 were new and 750 were rebuilds.

As Joe mentioned, our order backlog at September 30, 2015 was 12,237 railcars with a sales value of approximately $1.1 billion compared to a backlog of 13,514 railcars at September 30, 2014 and 14,075 railcars at June 30, 2015.

Industry-wide, 7,374 units were ordered and 20,476 units were delivered during the third quarter of 2015. While order levels are below those of recent quarters, industry-wide backlog consisted of 122,591 units at the end of September, which represents approximately six quarters of backlog.

Order levels for FreightCar America and the industry have softened over the past few quarters. While we are still receiving inquiries from existing and prospective customers, the volume is not as robust as it had been in recent quarters and customer inquiries have shifted away from energy markets to other end markets. We believe that the slowdown in order activity is partly attributable to the prolonged weakness in oil prices and other commodities.

Commodity loadings on US railroads in the third quarter of 2015 were down 5.4% when compared to the third quarter of 2014. Coal, metallic ores, crushed stone, sand, and gravel loadings have all weakened year-over-year. However, grain loadings exhibited growth, increasing by 7.5% in the third quarter from the third-quarter 2014 levels. Intermodal container loadings also grew 3.2% over the same time period.

Lastly, as others in the industry have noted, we too have had conversations with customers with respect to orders in our backlog which have resulted in various production schedule shifts and substitutions of railcar types. This activity is reflected in the Company backlog figure that we have provided. To date, we have been successful in finding mutually beneficial solutions with our customers and no outright cancellations of orders have occurred.

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 2015, consolidated revenues were $241.1 million compared to $190.3 million in the third quarter of 2014 and $235.6 million in the second quarter of 2015. Net income for the third quarter of 2015 was $14.8 million, or $1.20 per diluted share, of which $0.24 per diluted share related to the sale of the railcar repair and maintenance service business.

These results compared to net income of $6.4 million or $0.53 per diluted share for the third quarter of 2014 and net income of $7.4 million or $0.60 per share per diluted share for the second quarter of 2015. The significant improvement in earnings during the third quarter of 2015 was driven by higher margins, most notably within our manufacturing segment, which contributed to a consolidated gross margin of 12%. This compares to consolidated gross margins of 9.9% in last year's third quarter and 9.3% in the second quarter of 2015. Higher year-over-year and sequential gross margins were driven by increased delivery volumes, favorable product mix and improvement in production efficiencies.

Manufacturing segment revenues for the third quarter of 2015 were $233.3 million compared to $181.5 million in the third quarter of 2014 and $227 million in the second quarter of 2015. Manufacturing segment operating income for the third quarter of 2015 was $25.8 million compared to $16.2 million in the third quarter of last year and $17.2 million in the second quarter of 2015.

The services segment had revenues of $7.8 million in the third quarter of 2015 compared to $8.8 million in the third quarter of 2014 and $8.6 million in the second quarter of 2015. The services segment operating income was $5.2 million in the third quarter of 2015 compared to $1.6 million in the third quarter of last year and $1.5 million in the second quarter of 2015. Services segment operating income in the third quarter of 2015 included a pretax gain of $4.6 million related to the sale of the railcar repair and maintenance services business while the services segment operating income in the third quarter of 2014 included a pretax gain of $1.1 million related to the sale of the Clinton, Indiana repair facility.

Corporate costs for the third quarter of 2015 were $8.1 million compared to $6.5 million in the third quarter of 2014 and $7.8 million in the second quarter of 2015. The increase in the 2015 corporate costs was driven by legal costs associated with our retiree settlement agreement and ongoing patent litigation as well as by increases in incentive compensation expense.

Turning to our balance sheet, our financial position remains strong with no outstanding debt and $131.9 million in cash and short-term investments at September 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 partially offset by the receipt of net cash proceeds of $17.6 million related to the sale of our railcar repair and maintenance services business as well as $15.7 million of Alabama state and local incentives. We are pleased with our strong financial position and with the flexibility that it provides.

Following up on Joe's comments, we are pleased to have reached a settlement agreement with the United Steelworkers in connection with the retiree benefits legal proceedings. As we have previously announced, under the terms of the settlement agreement, FreightCar America will make a one-time cash payment of $32.750 million in exchange for full and final resolution of the matter. The settlement agreement is subject to final court approval, which is currently scheduled for early 2016.

Capital spending for the third quarter of 2015 was $6 million, of which $3.6 million related to the Shoals facility.

Year-to-date capital expenditures were $16 million. We now expect capital spending will be approximately $18 million for the full year of 2015.

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

Thanks, Chip. We are pleased with the continued progress in our manufacturing operations, which is evident in the strong results. We will continue to the aggressively work towards driving further improvement throughout all aspects of our organization.

As we look to 2016, we are favorably positioned with a good backlog. At the same time, however, we are closely monitoring our order activity across the industry and other industry trends for developments that could impact us.

With the financial stability provided by the pending settlement of the retiree medical obligation and the sale of our repair and maintenance business, we are confident in our ability to adapt to changing business conditions and we believe that our strong balance sheet, breadth of railcar products, flexible manufacturing capacity, and talented team provide us with the ingredients to generate long-term shareholder value.

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

(Operator Instructions). Michael Gallo, CL King.

Good morning. Just a couple of questions. I guess given that you don't plan to deliver any more of the refurb cars in 2016, I guess what are the plans for Danville at this point?

Again, we've got a good backlog and we've got work that we can put in there but where it goes will depend ultimately on what is the best economic answer and where customers need the cars delivered from.

Okay. And the second question I have is just for Chip. I think you mentioned, in the third quarter, there were some legal costs related to the settlement. Can you parse out how much that was and how we should think about ongoing legal expenses? Was this something that sort of tapers off as we get to Q1 in the finalization of the settlement, or do we have to wait until the finalization before we see that taper off?

It's Chip. We talked about this last quarter a little bit. We haven't parsed out r specifically identified the amount of legal costs that relate to the retiree settlement as well as the patent litigation that we mentioned last quarter. But because the settlement does -- the approval by the courts is the first quarter of 2016, we would expect the costs associated with the retiree settlement to abate and, frankly, go to basically zero from that point forward after the settlement. So if things go as planned, you will see a reduction at that point.

Great. Okay. And then just a final question for Joe, obviously the energy markets have been tough. At this point, how much of the backlog would be in the small cube covered hoppers? I would suspect there hasn't been anything on the order front on that for a couple of quarters. So I'm wondering if you can just parse out at all or frame around kind of what is in the backlog at this point. And obviously cal is de minimus, so I was curious if you can give us a similar number four small cubes? Thanks.

I'll let Ted answer that question.

Hi, Michael. First, I guess I'll take your last question first. The backlog consists of a wide variety of car types pretty much across all categories with the exception of tank cars. If we try to pull out what percentage of that is related to the energy market, obviously we're talking about frack sand covered hoppers. And while we don't typically disclose what's in our backlog, I would say roughly maybe a quarter of it is sand cars.

Thank you.

Matt Brooklier, Longbow Research.

Thanks. Good morning. So my first question has to do with your gross profit margin. You guys posted a 12%. It was a real nice step up from what you did in second quarter. I'm just trying to get a sense for the components of the improvement there. How much of the improvement was related to just doing more volume? How much of it was related to improved efficiencies at Shoals? How much of that was a function of mix improvement?

Matt, it's actually hard to pick out those individual pieces because it's a mix of all of those. There's definitely a product mix; there's definitely an improvement at Shoals. There's also improvement at other facilities. We've got this long rebuild order going at one of the plants and that's taking good efficiency. So we've kind of seen it across the board, so it's hard to pick out any one of those and quantify each of those. It's actually a blend of all of those, including more deliveries in the quarter, which naturally make it a little more productive.

Okay. I guess I'm trying to get a sense for if this is the new baseline of profitability for your manufacturing segment on a go-forward basis. The removal -- the sale of your services business, what does that mean? And I realize it's a smaller part of your total business, but what does that imply for gross profits on a go-forward basis?

It's Chip. In terms of the services segment, I'll start with that one, you know, you've seen our parts business of the services segment has averaged about $12 million over the last three years. We are at about $7 million year-to-date in revenues in the services segment for parts. So the transaction closed at the end of the third quarter, so what we'll see is a drop-down in that segment without the repair business.

From a margin standpoint, we haven't gotten into the split-out of margins between the repair business and the services business. It's a good margin business but at this point in time, we are not commenting on the drop-down.

The parts business, when you look at the normal $9 million the services business generates in revenue parses out $1 million a month of that and they typically are a little bit higher margins than the services business on average. But aside from that, we won't get into specific margins.

Okay. That's helpful. And then you are at the midpoint of your delivery guidance for 4Q, what's implied. It looks like deliveries are potentially down sequentially yet in the past three or four years, your deliveries have been up on a sequential basis. So I'm just trying to get a sense for if there's anything specific that would cause deliveries to be down fourth quarter versus third quarter, if there are some planned line changeovers, if there's delivery timing issues, if there's been any deferral in terms of the backlog and maybe pushing some energy related cars out into 2016? I'm just trying to get a sense for what 4Q could look like from a delivery perspective and if there are any headwinds that we should be thinking about. Thanks.

This is Joe. I think, when we look at Q4, what we see is the sequential drop. I think as we mentioned last quarter that fourth quarter would be lower than the third quarter. That's pretty typical with the two big holidays in there and then shutting down the year-end inventories. And in addition, as we look at the forecast here for the quarter end deliveries and actual product line changeovers and the timing of some of what I'll call deliveries right at year end, it kind of gets us to that range so that's really what's driving it are really those two things.

Okay. That's helpful. Thank you.

Justin Long, Stephens.

Thanks and congrats on the quarter. So, the demand environment in coal seems to be getting worse. If you aren't expecting an improvement anytime soon, I wanted to ask, are there any structural or strategic changes you can make to help mitigate this headwind? I know Shoals was a big step in terms of diversifying the business, but I'm just curious if there are any other levers that you can pull?

In terms of the business -- in terms of coal cars, there's not much we can do there to generate demand because it really comes down to what gets mined and needs to be shipped, so there's little we can do there.

In the meantime, what we are looking at is making sure we get the productivity improvements across the business, keep the diversification going. We do have a couple of new car types that we will be introducing and building next year, so it's that continued kind of diversification, as well as looking at still our parts business or the leasing business and what opportunities can be out there internationally.

Okay. Great. And you mentioned the order environment flowing and inquiry environment slowing. I wanted to ask if you could share what you've seen in terms of new car prices. Has it become a more competitive environment in the last few months, or have new car prices held pretty firm?

Hi, Justin. It's Ted. It has gotten competitive. Obviously with inquiries softening a bit, things have -- they always have been competitive and I would say that are going to continue to be competitive going forward.

Is there anything in terms of the order of magnitude you'd be willing to share, maybe the percent decline you've seen in car prices across the board?

I don't think we are going to get into that level of detail. It depends on what car type we're talking about. There are a lot of factors that affect pricing, so I'll just generalize it as saying that it's generally competitive across the spectrum.

Okay. Fair enough. And maybe, for my last one, I think you've previously said that Shoals is a higher fixed cost facility because of some of the technology and the equipment there. Is there any way you could give us a sense for how the cost structure at Shoals breaks down between fixed and variable costs and how that split compares to your other facilities?

Your general statement is accurate, but in terms of a split of fixed variable or breakeven, Justin, we just haven't gone there with our facilities breakdown.

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

Mike Baudendistel, Stifel.

Thank you. Most of my questions are related to the services business since that's the new development here. I guess I just want to first understand the revenue impact. So the services business on an annual basis was about $35 million and you said the parts business that remains was $7 million year-to-date, so call it $10 million on an annual basis. And so the revenue that you divested was about $25 million on an annual basis. Is that right?

It's somewhere between $20 million to $25 million depending on the year, but that's the range.

Okay. And then can you talk about the fixed cost associated with the services business that you no longer are going to have or the impact on -- that should have a reduction in SG&A going forward with the smaller services business?

The SG&A portion was largely a standalone business, pretty self-contained and, frankly, a pretty light footprint from an SG&A perspective. So I wouldn't expect a very significant impact on SG&A or fixed costs with that business going away.

Likewise, Mike, when we bought it, if you go back and look, there wasn't a big jump up in SG&A other than the SG&A that came with the business.

Okay. And then maybe just at a high level, sort of why divest that portion of the services business now? I was always under the impression that you sort of like that business because it was much more -- much less cyclical than the manufacturing portion of the business. Was it just an attractive price or do you see some of the end markets there as being secular decliners? And do you envision building out the services businesses again in the future?

If you look at the business -- I think we've said we like the business, we like the stability but when you look at the overall market where it's at in terms of the railcar repair market -- now is a good time to activate and get value that we're comfortable with so we can focus on better growth opportunities within our manufacturing parts and other parts of the business.

Okay. And then the last one for me is just following on a previous question about the gross margins in the quarter, which were better than they have been. Maybe to just ask it another way, was there anything sort of one-time in nature propping that up in the third quarter that you are not going to have going forward?

You have -- I'm going to go with the obligatory -- mix makes a difference in terms of what car types are delivering in a given quarter. And we don't get into that but there's nothing unusual, no callouts. As Joe said, we saw very good efficiencies throughout the quarter and that really did help the strength in some of those -- specifically some of the longer run jobs in the quarter where we are positive. So nothing specific to call out. Again, the volume was up as well, which helps.

And again, I think there was a question asked earlier about the 12%. I want to make sure to put a little color on it, while there is nothing in there. As we look forward into 2016, we are going to have a headwind of lower volumes. That always drags down from an operating efficiency, but it's hard to know exactly where we are going to end up because we continue to improve our productivity in Shoals. There is, as Chip said, mix (technical difficulty) some pricing. So there is a lot in the mix as it relates to what next year looks like at a margin level.

Sounds good. That's all I have. Thank you.

(Operator Instructions). Michael Gallo, CL King.

Just two follow-ups. First, given the decline in shipments you expect in 2016, I was wondering what you think you can take out of working capital?

No dollar amounts but it's a natural trend. We buy inventory to support jobs in the backlog that are currently queued up. So the expectation from an inventory standpoint, Michael, is that it will come down. We just haven't been out there in terms of guidance of cash flow off the balance sheet, but it's definitely a trend that you should expect to see into 2014 -- 2016.

Great. And then a question just in terms of the shipments for next year. Is it completely in the backlog at this point? In other words, if orders at some point pick up over the next three to six months, could there be upside to that number, or it's pretty much all the slots at Shoals are pretty much full at this point for 2016 with backlog?

Hi, Michael. It's Ted. Most of the backlog is set for 2016. There are some opportunistic slots here and there.

And then to your other question, if we see a pickup in one or more particular markets, we have the ability to ramp up and deliver those needs as well. So, we remain fairly flexible heading into next year.

Thank you.

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 p.m. Eastern time today at 800-475-6701, passcode 371914. Good day.

Ladies and gentlemen, you may disconnect. Thank you.