FreightCar America Inc (RAIL) 2015 Q4 法說會逐字稿

Welcome to FreightCar America's fourth-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 PM Eastern time today until 11:59 PM Eastern time on March 23, 2016.

(Operator Instructions)

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 Mike Cieslak, Manager, Financial Planning and Analysis of FreightCar America.

Thank you and welcome to FreightCar America's fourth-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 Shawn Hankinson, Vice President of Manufacturing Operations.

I would like to remind everyone that statements made during this conference call, relating to the Company's expected future performance, future business prospects for 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 and 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 fourth quarter and full year of 2015 are posted on the Company's website at www.FreightCarAmerica.com.

Let me now turn the call over to Joe McNeely.

Thank you Mike and good morning everyone. I'm pleased to report another strong quarter of results. Fourth-quarter net income of $11.7 million, or $0.94 per diluted share, was up substantially versus last year largely driven by stronger manufacturing margin. These results contributed to full-year 2015 diluted earnings per share of $2.58 or $2.32 when excluding the gain on sale of the repair and maintenance business which we sold in third quarter. This marks the highest annual EPS for the Company since 2006.

The success of our railcar diversification strategy and continued operational progress at our Shoals facility, where we completed the buildout of our manufacturing capacity, where major factors in the achievement of strong earnings in 2015. Notably, approximately 62% or our 2015 deliveries were non-coal cars up from 43% and 32% of deliveries in 2014 and 2013 respectively. This trend will continue in 2016, there's a backlog that is almost entirely comprised of non-coal cars.

On the topic of backlog we ended the year with 9,800 railcars valued at more than $920 million which provides us with a solid base of business as we entered a lower, but more typical, demand environment. Looking forward we now anticipate full-year 2016 deliveries to be between 6,000 and 7,000 railcars with the balance of the backlog extending into 2017 and beyond. As a result of various customer-driven factors that Ted will provide some details on in a moment.

Separately, given the coal-car market's ongoing challenges, coupled with the completion of our coal-car rebuild program, we made the decision to significantly curtail operations at our Danville, Illinois facility. During this period, however, our sales team continued to actively market orders that may be suitable for Danville.

Moving on to an update of our long-running retiree medical-benefits litigation. The court granted final approval of the settlement agreement with United Steelworkers Union and other plaintiffs on January 19. On February 17, certain plaintiff class members requested a 30-day extension to file an appeal which the court denied yesterday.

Per the settlement agreement we expect to make the cash settlement payment of approximately $33 million in accordance with the terms of the settlement agreement. This will result in a one-time tax gain of approximately $12 million, which we expect to be recorded in the first quarter of this year. This settlement removes a significant contingency from our books and further allows us to remain focused on the execution of our strategic priorities.

Finally in late January we appointed Matt Kohnke as Vice President of Finance, Chief Financial Officer and Treasurer of our Company. He has 25 years of finance and accounting experience and joins us from Dorman Products, Inc., a publicly-traded supplier of replacement parts and fasteners to the automotive aftermarket.

He has been with Dorman since 2002 and he has been its CFO since 2011. We feel that his background as a public company's CFO in the industrial space, coupled with his 10 years of [public] accounting experience at Arthur Andersen, will serve us well as we continue to reshape our Company and execute against a strategic objective. On behalf of the Company,, I would like to thank Chip Avery, our former CFO, for all his hard work and contributions and wish him well on his future endeavors.

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

Thank you Joe. Overall, railcar demand has softened from its peak of the past couple of quarters due to the continued weakness in oil prices and commodities in general, as well as a reduction in manufacturing. These factors have collectively impacted railcar loadings earnings.

Commodity loadings on US railroads in the fourth quarter of 2015, were down 11.3% when compared to the fourth quarter of 2014. Coal, grain, metallic ores, and crushed stone sand and gravel loadings, all weakened in the fourth quarter of 2015 from fourth-quarter 2014 levels. Intermodal container loadings, however, grew slightly by a 0.5% over the same period.

Deliveries for the fourth quarter of 2015, totalled 2,464 railcars, which included 1,692 new, 672 rebuilt, and 100 leased railcars. This compares to 2,360 railcars delivered in the same quarter of 2014, which included 1,260 new and 1,100 rebuilt railcars. There were 2,846 railcars delivered in the third quarter of 2015, of which 2,076 were new and 770 were rebuilds.

Our order backlog at December 31, 2015 was 9,840 railcars with a sales value of approximately $926 million down from a backlog of 14,791 railcars at December 31, 2014 and 12,237 railcars at September 30, 2015. The backlog reflects the receipt of net orders of 67 railcars in the fourth quarter of 2015.

Order levels for the fourth quarter of 2015 compared to 3,637 units ordered in the fourth quarter of 2014 and 1,008 units ordered in the third quarter of 2015. Order activity in the fourth quarter of 2015 reflects the current demand environment and included the substitution of railcar types, deferral's in the production schedule, and cancellations.

This cancellations have all been related to substitutions into other car types where we received other net economic benefits. It is important to note that we work with our customers to find mutually beneficial solutions and, as a result to date, there have been no adverse changes to our backlog other than the timing of their production.

Given current and expected industry conditions we continue to have discussions with some of our customers regarding certain orders in the backlog. As these discussions progress, we will continue to strive to reach mutually beneficial solutions with our customers. Industry wide 9,169 units were ordered and 20,296 units were delivered during the fourth quarter of 2015. Industry wide backlog consisted of 111,019 units at the end of December 2015, down from 142,837 units at the end of 2014. Please note that these industry figures do not include orders, deliveries, or backlog totals for rebuilt railcars.

Now, I will turn the call over to Joe.

Thank you Ted. Since Matt will not join us until next week I will recover the review of our financial results. At this point I assume all of you have read our earnings release and saw the strong results we achieved in fourth-quarter and full-year 2015. I won't repeat what was included in the release but I would like to highlight a few items.

With the third-quarter sale of our railcar repair and maintenance business, we changed our reporting segments. The Manufacturing segment continues to include our railcar manufacturing and leasing operations. FreightCar America's other operations are included in Corporate and Other [in] segment which includes our parts business, administrative activities and all other non-operating activities.

For the fourth-quarter 2015 our manufacturing revenues were $200.3 million compared to $204.5 million in the fourth quarter of 2014 and $233.3 million in the third quarter of last year. Parts sales revenue, which are now included in Corporate and Other segment, were $3 million for the fourth quarter of 2015 compared to $2.5 million in the fourth quarter of 2014 and $2 million for the third quarter of last year.

During the fourth quarter of 2015 the Company had no revenues related to the railcar repair and maintenance business compared to $5.5 million in the fourth quarter of 2014 and $5.8 million in the third quarter of last year. Notwithstanding the slightly lower revenue in the fourth quarter as compared to last year, earnings grew considerably on a year-over-year basis primarily as a result of significantly higher manufacturing margin which contributed a consolidated gross margin of 13.4%. This margin reflects strong pricing on certain orders in addition to amortization the state and local incentives received in 2015.

Selling, general, and administrative expenses for the fourth quarter of 2015 were $11.2 million compared to $9 million in the fourth quarter of 2014 and $10.7 million in the third quarter of last year. The increase on a year-over-year basis was attributable to higher legal costs associated with the retiree medical benefits and ongoing patent litigation, as well as to higher incentive compensation rates and expense related to higher 2015 earnings.

Our effective tax rate was 27.3% for the fourth quarter of 2015 and was favorably impacted by our R&D tax credit and domestic manufacturing tax benefit. The tax rate for the full year of 2015 was 31.8%. For the full year of 2016 we currently anticipate an effective tax rate of approximately 34%.

Turning to our balance sheet, our financial position remains strong with no outstanding debt and $117 million in cash and short-term investment at the end of the year. Versus $168 million at the end of 2014 which included a $43 million customer deposit.

The 2015 ending cash and short-term investment balance reflects an increase in working capital to support production requirements, partially offset by the receipt of cash proceeds of $17.6 million related to the sale of our railcar repair and maintenance business, as well as $15.7 million of incentives related to our Shoals facility. We are pleased with our strong financial position and with the flexibility this provides.

Capital spending for the fourth quarter of last year was $500,000 while our full-year 2015 capital expenditures were $16.7 million. We currently expect capital expenditures to be approximately $12 million for 2016.

In conclusion, 2015 was a successful year for the Company as we achieved strong financial results, while accomplishing a number of key objectives. We refocused the Company on its manufacturing parts and leasing businesses through the strategic sale of our railcar repair and maintenance business, we introduced a number of new car types to the market, we completed the buildout of our Shoals production capabilities and settled our retiree medical litigation.

As we enter 2016 it's important to be mindful of our anticipated lower delivery volumes and the associated reduction on operating leverage and margin, as well as the current economic and competitive environment we are in. With the diversified backlog of railcars and another year of experience at Shoals, we feel we can continue to be competitive on our new car types. Further, with a solid balance sheet we have a strong foundation to continue strategically investing in our future, while working to create long-term value for our shareholders and our customers and our employees.

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

Thank you.

(Operator Instructions)

Michael Gallo, CL King.

Good morning. Congratulations on the good performance in, I know, a challenging environment. Just a couple of questions, Joe, how much would you expect OpEx to be down in 2016 versus 2015 between the reduction of legal expense as well is the idling of Danville?

The legal expense is hard to predict and the timing though we still have ongoing litigation. We do expect overall SG&A to be down in 2016 as compared to 2015 given that as well as lower incentive comps given 2015 was such a strong year on earnings.

Could you give us a range at all in terms of how much you think you will save from idling of Danville as well as how much incentive comp was up in 2015 versus 2014?

Mike, you know we don't give financial guidance at that level.

Okay. Just some thoughts, Joe, on working capital, I know you still had -- receivables were still pretty high at the end of the year. Certainly by historical standards, I would assume receivables should come down dramatically. What should we expect in terms of cash benefit from working capital overall in 2016 based on what you expect in orders?

Good question. As we've talked before and in a period when production demands increasing, working capital tends to go up. As you'll recall we buy inventory for order. And then receivables is just a function of timing of when cars got shipped versus when they're paid. As of right now, most of what was sitting on those balance sheet receivables has already been collected. The bigger question as we go through year as orders -- typically deliveries go down year over year, your typically working capital amounts go down and current working capital gets turned into cash.

So we would expect working capital certainly is going to be a source of cash from where it was at year end and potentially a meaningful source of cash, is that fair?

It's fair but I always -- in the past when we've gotten this question, I've cautioned it really comes down then at any quarter end or year end. We're at a timing of buying inventory and paying for that for the next quarter and (multiple speakers) the year go.

Can you talk about just the (inaudible) this final question. Can you talk about the order environment at all, do you see some orders out there for the large cube-covered hoppers or intermodal? Just walk us through what you see out there. Obviously it's competitive for what it is out there. Are you still seeing orders broadly or should we expect that we won't see much on the order front on the first half of 2016?

Hey Michael, it's Ted. In general we see the inquiry levels are down and the commensurate order levels that follow are also down. But there is still activity. It's not where it was for the past couple years but we still see activity in certain sectors. The one's you've mentioned as well as construction materials such as aggregate and rock and that sort of thing. So, we're still keeping busy on the sales front trying to get out there and respond to customers' needs.

Thank you.

Justin Long, Stephens.

This is actually Brian [Collie] taking the call for Justin. I know you guys haven't given any margin guidance for 2016 and probably don't intend to do so. But if I look at the implied ASP in the backlog today of about $94,000 per car, it would appear that mix should be a tailwind this year. Am I thinking about that correctly or are there cars slotted for 2017 and beyond that are skewing that number.

You always get into little bit of mix on that. On ASP I think your number of the [94] is about right -- what we're looking at. Again, as you compare that to prior years you have to be a little careful because of how the rebuilds, but with no rebuilds in here, that's a pretty good number.

Would you expect that to be a tailwind in 2016 to margins?

In terms of margin [percentage] I was trying to indicate in my comments as you look with just lower deliveries we're going to lose a little bit of operating leverage at some of our facilities. We do expect gross margin to decrease but again we won't give specific guidance on that.

That's helpful. And just looking at your new delivery guidance for this year, could you speak to what drove the reduction versus the guidance you gave last quarter?

Brian it's Ted again. It just relates in general to what we've been talking about, softer environment. We have had some substitutions and deferrals and that sort of thing. So, just a general reflection of the overall economy in the railroad traffic that has seen a tremendous decrease over the last quarter or even last year.

That's helpful. Just one last quick housekeeping question, could you provide the number of coal cars in storage was at the end of this quarter? And also, if you have it handy, what that number was at the end of 3Q?

It's not an exact science but we have the number pegged roughly around 30,000 coal cars in storage and that has been fairly consistent over the past several quarters. It hasn't really moved.

That's all I've got. Thanks for the time.

Mike Baudendistel, Stifel.

Just wanted to get a clarification, wanted to make sure I heard the comments correctly on the cancellations. It sounded like there were some -- nothing was canceled outright that was taken out of the backlog but there were some units that were essentially pushed further into the future, did I get that right?

Yes, hey, it's Ted. The customers -- in certain customers, not a big number, but they look to get out of some firm-order positions, so we either substitute into different car types or we differ outward. In some cases we did see where the substitution wasn't one-for-one and therefore there were other economic benefits, if you will, that we were able to gain from the transaction. Still creating a win-win solution for both us and the customer who is looking to get out of their position. It's mostly substitutions and some deferrals and a small number of cancellations.

Okay, and so was that the main reason for the 1,000 unit reduction in guidance?

No, we did not have cancellations anywhere near that number of 1,000 units. The reason for the reduction in guidance is just the overall softening market, inquiries are down, order intake is down and that is reflective of our updated delivery numbers for this year.

Sure, okay, that make sense. And then with close to 10,000 units in backlog, would think that close to 6,000 to 7,000 units are already booked that are in that backlog. Is that a fair assumption? That are scheduled to be delivered in 2016.

We still have pockets of availability but that's a fair statement.

Okay and then any comments on whether your 2016 deliveries will be weighted towards the first half for the second half? I know sometimes you have some quarters where you deliver more cars than others.

We see those fairly level across all four quarters.

Okay great. And then I just want to ask you -- the manufacturing gross margins were strong in the last quarter, the fourth quarter and I know you said there is going to be some negative operating leverage going forward. And just wanted to check to see if there were any one-time items or events in the fourth quarter that caused that stronger than the normal manufacturing gross margin.

This is Joe. Getting back to my comment again, a big portion of that was driven by several orders that we had really good pricing on that we delivered in the quarter.

Okay great. That's helpful. Thank you.

Thank you and at this time there are no further questions in queue. I will turn it back to our Management panel.

This concludes today's conference call. Thank you for joining us today. A replay of this call will be available beginning at 1:00 PM Eastern time today at 1-800-475-6701 passcode 386239. See you next quarter.

Thank you. Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.