FreightCar America Inc (RAIL) 2016 Q1 法說會逐字稿

Welcome to FreightCar America's First Quarter 2016 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 3, 2016. To access the replay, please dial 800-475-6701. The replay passcode is 392000. 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 conference over to Matt Kohnke, Chief Financial Officer of FreightCar America.

Thank you and welcome to FreightCar America's first quarter 2016 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 2015 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. We will also make references to adjusted operating income and adjusted net income. Neither of these is a measure in accordance with GAAP. For a reconciliation of adjusted operating income to operating income, the most directly comparable GAAP measure and for a reconciliation of adjusted net income to net income, please see the supplemental disclosure attached to the earnings release.

Our 2015, Form 10-K and earnings release for the first quarter of 2016 are posted on the Company's website at www.freightcaramerica.com.

Let me now turn the call over to Joe McNeely.

Thank you, Matt, and good morning everyone. Before I get started, I would first like to welcome Matt Kohnke to the team and his first quarterly call with our Company. Since last quarter's call, Matt has officially joined us from Dorman Products, another publicly held company where he was CFO since 2011. We're excited about the experience Matt brings with him as we look to create long-term value for our shareholders.

Moving on to review of the quarter, I'm pleased to report another solid quarter result. First quarter net income of $12.7 million or $1.03 per diluted share included approximately $9 million gain on the settlement of the hourly retiree medical benefit litigation. Excluding this gain adjusted net income was $3.4 million or $5.5 million higher than the same period last year. This improvement was driven by double-digit gross margins, which we obtained for the third consecutive quarter and speaks to the success of our railcar diversification strategy.

Looking forward, the continued decline in railcar loadings may put additional pressure on our customers to cancel, defer or substitute orders. While we cannot predict how long the current down market cycle will last, our efforts will be focused on maximizing our operating efficiency in managing our cost structure to reflect our current production plan. As we discussed on last quarter's conference call, given the coal car market's ongoing challenges and coupled with the completion of our coal car rebuild program, we significantly curtailed operations at our Danville, Illinois facility.

However, our sales team continue [to actively] market orders that may be suitable for Danville. Our backlog at the end of the first quarter was about 7,700 railcars, which provides us with a solid base of business as we enter a lower demand environment. For the full year 2016, we now anticipate deliveries to be between 6,000 and 6,500 railcars, with the balance of the backlog extending into 2017 and beyond.

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

Thank you, Joe. Overall, we are still in a period of relative softness for railcar demand. While we do see some pockets of demand in certain car types, inquiry levels remain below 2014 and 2015 levels. Commodity loadings on US railroads in the first quarter of 2016 were down 13.8% when compared to the first quarter of 2015. Coal, grain, metallic ores and crushed stones, sand and gravel loadings all weakened in the first quarter of 2016 from the first quarter 2015 levels.

Intermodal container loadings, however, did grow by 4.6% over the same time period. Deliveries for the first quarter of 2016 totaled 1,609 railcars, all of which were new railcars. This compares to 1,059 railcars delivered in the same quarter of 2015, which included 651 new and 408 rebuilt railcars. There were 2,464 railcars delivered in the fourth quarter of 2015, which included 1,692 new railcars, 672 rebuilt railcars and 100 railcars leased. Our order backlog at March 31, 2016 was 7,735 railcars with the sales value of approximately $759 million, down from a backlog of 15,068 railcars at March 31, 2015 and 9,840 railcars at December 31, 2015.

The March 31, 2016 backlog reflects new orders taken of 145 railcars and cancellations of 641 railcars that we received in the first quarter of 2016, order levels for the first quarter of 2016 compared to 1,336 units ordered in the first quarter of 2015 and net orders of 67 units ordered in the fourth quarter of 2015. Similar to last quarter, customers are struggling with asset utilization as a result of lower commodity traffic, higher train velocity and a high level of existing equipment in storage. As such, we have had and continue to have conversations regarding substitutions, deferrals and cancellation of railcar types. First quarter cancellations are reflected in our March 31 backlog. Today, we feel comfortable in our delivery guidance range of between 6,000 and 6,500 railcars.

Now I would like to turn the call over to Matt to address our first quarter financial results.

Thank you, Ted. First I want to thank the management team for being so welcoming during my first few weeks here. It's been extremely exciting and I look forward to working with our analysts and shareholders in discussing our Company's results and strategic initiatives as we move forward.

Consolidated revenues were $148.6 million in the first quarter of 2016, compared to $92.8 million in the first quarter of 2015 and $203.3 million in the fourth quarter of 2015. Revenues decreased over the fourth quarter of last year due to the lower number of railcar deliveries. Consolidated operating income for the first quarter of 2016 was $19.6 million, which included a pre-tax gain on the settlement of our hourly retiree benefit litigation of $14.3 million. This settlement will result in lower expenses going forward of approximately $3.7 million annually. Excluding this gain, adjusted operating income for the first quarter of 2016 was $5.3 million, compared to an operating loss of $3.1 million in the first quarter of 2015 and operating income of $16.1 million in the fourth quarter of 2015. The decrease in adjusted operating income versus the fourth quarter of 2015 reflects lower deliveries, primarily attributable to the completion of the coal car rebuild program at Danville, as well as the change in product mix and pricing.

Selling, general and administrative expenses for the first quarter of 2016 were $10.6 million, compared to $8.8 million in the first quarter of 2015 and $11.2 million in the fourth quarter of 2015. The increase, on a year-over-year basis was attributable to higher personnel-related expenses including severance, as well as to the ongoing patent litigation. The effective tax rate was 35.5% in the first quarter of 2016.

Turning to our balance sheet, our financial position remained strong with no outstanding debt and $96 million in cash and short-term investments at March 31, 2016 versus $117 million at the end of 2015. Excluding the $33 million settlement payment related to the retiree benefits litigation, we've generated positive cash flow of approximately $12 million. Capital spending for the first quarter of 2016 was $2.4 million. For the full-year of 2016, we continue to expect capital expenditures to be approximately $12 million.

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

Thanks, Matt. While we are pleased with our first quarter financial results, we're also mindful of the environment we are currently operating in. Under the aforementioned market conditions, we are focused on optimizing our cost structure, improving our operational efficiencies and refocusing our marketing efforts to pursue new orders. We have successfully managed our uncertainty in past cycles, and our strong balance sheet will assist and provide necessary support to work through the current market condition that will enable us to provide long-term value to our shareholders, customers and employees.

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

Thank you. (Operator Instructions) Michael Gallo, CL King.

A couple of questions. Do you feel the backlog at this point is de-risked? I mean, obviously you had the cancellations. I think the preponderance of what's remaining is expected to ship this year or early next year. So just walk us through how comfortable you are with where the backlog sits today post those cancellations?

Hey, Michael, it's Ted here. As we said in our opening remarks, we do continue to have conversations with customers regarding production schedule changes, substitutions et cetera, but we will reiterate that the 6,000 to 6500 car guidance for the year remains accurate and we feel comfortable with that.

Okay. Are there any -- I know you mentioned Ted in your prepared remarks that you saw some areas where there are pockets of strength in orders or potential inquiries. Can you speak to some of those areas and then can you also speak to whether you've seen any change in the level of increase thus far in Q2 relative to Q1?

Sure. The areas of strength that we see from the industry perspective is automotive, intermodal and certain construction material segments. But other than that the rest of the commodity segments are struggling right now, certainly coal being at the top of the list. And I would say that we haven't seen that change markedly from Q4 2015 into Q1 2016 and as we sit here today going into the first few weeks of Q2, we really haven't seen much of a change in that regard either.

Okay. And then just final question, I was wondering the G&A level in Q1 -- I was wondering if you could break out how much the severance and legal expenses were on an incremental basis year over year. And also with some of the other adjustments you made to cost, I know you have legal, but what kind of G&A level should we expect kind of Q2 through Q4 with the legal now behind you and with obviously the reduced manufacturing footprint? Thanks.

Sure, Mike. It's Matt. Good morning to you and everybody. The first question related to the severance, there were total severance and other personnel costs in the quarter of about $650,000 that would be considered one time. Beyond that, the legal cost you said behind us, it's not really behind us. There is other ongoing litigation that we have, and it's hard to predict the timing of all of those expenses going forward. What I would say is as we look out to 2016 we'd expect SG&A levels to decline compared to 2015 levels and be more in line with those levels around 2014.

Justin Long, Stephens.

Wanted to ask when we look at the 2016 delivery guidance, if there was any color you could provide on the quarterly cadence of deliveries you expect over the remainder of the year?

Hi, Justin. It's Sean Hankinson. Going forward, the second quarter is going to be stronger than third and fourth just based on changeovers and product mixes.

Okay, great. I guess that kind of implies from a margin standpoint as well. I know you don't give specific guidance, but maybe better margins in 2Q than 3Q and 4Q?

Justin, it's Joe. Again, that will be -- we don't give the guidance, and that's always a function of mix of products in that as well as volume of deliveries. Volume, we're definitely going to be higher in Q2 than 3 and 4, but aside from that there is probably no other comment.

Okay. And then, I also wanted to try to frame up the potential risk from cancellations or deferrals going forward. I know we saw some of that here in the first quarter and maybe the best way to look at it is, if you can, is to say what percent of your backlog today you would feel would potentially be at risk based on the conversations that you're having with your customers?

Justin, it's Ted again. We have firm contracts in place across the board, very strong cancellation clauses. So to answer your question, we feel comfortable that those contracts will remain in place. However, having said that, we also realize that the customers are struggling with the economic environment right now, the industry conditions, and it's a narrow customer base, a tightened industry, we have long customer relations, and we want to help those customers out. So we're not going to get into the specifics, we will continue to endeavor to find win-win solutions with those customers to defer or substitute primarily and I think we'll just leave it at that.

Fair enough. Is there any color you could provide on the car types that were canceled? I'm guessing those were probably small cube covered hoppers, but maybe the car types you saw cancelled in the first quarter and the car types where you see potential risk going forward?

Yes, Justin, we are not going to get into the specific details of what was canceled. We don't get into that level of detail, but if you look at it from an industry perspective, there were 6,000 cars canceled in the industry. So, our -- a lot negative -- our 496 cancelation is a small portion of that broader number. And in the industry number, you see that there were some small cubes canceled as well as some (inaudible) equipment and others. We're not going to comment on (technical difficulty).

Okay. And I guess one last question from me. Clearly, you have a healthy balance sheet, but as we look out the next few years into the market there could be, call it, at or below replacement levels. Could you talk about your ability to sustain that balance sheet? Let's say, we saw the industry deliver an average of 40,000 to 50,000 cars annually for the next several years. Is that an environment where you can maintain or grow your current cash balance or is that an environment where you think you would be burning cash?

Justin, this is Joe, I'll take that. I think when you look through the last kind of cycle, you see that as the cycle -- when you're in a downward slope, our business we tend to generate cash -- working capital and the balance sheet gets generated until of such point that you end up needing to rebuild that to go up. So, I think at least in the near term here, we probably do expect our cash balance still to be pretty -- generating ability to be pretty good. Now, if it goes on for years, a lot of that then depends on what the pricing looks like as well as actual volumes of delivery. That's going to be -- that one is pretty hard to say with any degree of certainty.

Okay. Thank you. I will leave it at that. Appreciate the time.

Thank you, Justin.

Matt Brooklier, Longbow Research.

I just wanted to take one more shot at the cancellations during the quarter. Was it just one customer or was it multiple customers? Are you able to share a bit more in terms of what are all the cancelations and if it was just one customer or multiple customers?

Hey, Matt. I appreciate the third attempt to get information. We're just going to -- we're not going to be able to comment on with that level of specificity.

Okay. Are you able to provide some color in terms of the current backlog, the types of cars that are in the backlog? I'm not sure if you want to give percentages in terms of the big buckets, but can you just talk about what's in the backlog at this point in time from a car type perspective?

Yes, sure. We see a broad mix of car types potentially everything except for coal. We don't do tank cars and we don't do auto rack. So just about everything else is in our backlog. It's the first time in the Company's history that we had virtually no coal cars and we're excited that we've got up to this point and diversified our backlog.

Okay. And then did you comment on demand activity, any inquiries subsequent to the quarter closing?

I did mention that it's about the same as Q4 2015 going into Q1 and then just a little bit into April. It's still about the same. We see pockets of demand for limited car types, not a lot of volume. So, overall theme is it's tough out there. Our customers are struggling to rationalize their equipment given the uncertain economy, but we do have -- the sales team is focused on chasing a few select segments, if you will.

Okay, understood. And then just my last question, can you talk about potential cost levers that you can pull as we progress through the years or potential incremental op costs you can take out of the model? Is there a potential to further rationalize your manufacturing capacity? Maybe just give a little bit of color in terms of your ability to potentially take some fixed cost out of the model.

I'll take that, Matt. This is Joe. I think as I said in my opening comments, when we look at Danville, that's going to be a piece of that given where the volume on the coal cars and the rebuild program is now over, that operation has since been curtailed. Elsewhere, we're going just looking at all what I call discretionary spending, nothing specific. The rest of the footprint as we look at the production of the 6,000 to 6,500 Roanoke and our Shoals facility, they're going to be pretty busy the rest of the year. So, we'll be looking at discretionary spending items.

Okay, that's helpful. Appreciate the time.

Mike Baudendistel, Stifel

I think I heard you say that you have cancelation clauses in your contract. I just wanted to ask you, did you receive any compensation for the orders that were canceled or any other concessions from customers?

Mike, Ted here. Again we're not going to get into those levels of details.

Okay. And then I know you don't disclose your backlog by car type, but is it possible to tell us order of magnitude, how many of those cars are small cube covered hoppers because I think those are the cars where most of these cancelations were in the industry in the quarter, and that's the ones people are most concerned about going forward?

Yes, as I said, the backlog is a broad mix of car types across all non-coal, non-tank, non-auto rack, and there is no real concentration of any one car type.

Okay. And then, is there anything you can share with us about how much fixed cost there is at the Danville facility since that's the one that you're scaling back in terms of capacity and is that where most of your unionized employees are located and how flexible are you with scaling labor efforts there?

Yes, this is Joe. I think as I indicated in the last -- fourth quarter call, earlier this year, we had already scaled back a lot of that operation and continue to do that. So, a lot of those costs are behind us. There may be a little more to go. It is a represented facility, but we are doing everything within our contract there. In terms of fixed cost, it's not a high fixed cost facility per se. You may recall back in 2013, we did take some charges related to that facility that reduced our fixed cost footprint.

Okay. And then, the last one for me is, I guess, for those people that aren't expecting a lot of orders going forward next few quarters, because all of the industry headwinds. Is there a certain breakeven point that you have in terms of how many cars you have to build in order to have a breakeven EPS? I think Justin asked about cash flow, but do you have any sense on EPS?

Yes, Mike. This is Joe again. We don't give financial guidance. We don't comment on the breakeven question.

Okay, that's all from me.

Michael Gallo, CL King.

I just want to ask a question on working capital. Assuming orders stay at a very low level and you kind of run through your production over the next 6 to 12 months where you run through your backlog, what do you think you can take out of working capital? Thanks.

Mike, this is Joe. I think as we've talked through as we produce the working capital, which is inventory [and AP] gets turned into cash. Receivables are never really big for us. That's just the timing of matter when between delivery and collection. So you see a lot of that, what's on the balance sheet gets converted to cash. What's hard to answer that question is, what do we need then to buy inventory and pay for. So, it's always hard to predict where our cash balance and working capital is going to be at any quarter-end.

It's a history to any guy who certainly have seen many quarters where receivables were, say, south of $10 million and inventories were certainly well below $100 million. So, within particularly inventory which I know was up sequentially this quarter, it would seem that's probably an area you have a lot of room over time, would you agree with that?

Yes. And I think that's probably what we were saying is as the backlog is built out, assuming it's not getting replaced, that get monetized.

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 1:00 PM Eastern Time today at 1800-475-6701; pass code, 392000. Good day.