FreightCar America Inc (RAIL) 2016 Q2 法說會逐字稿

Welcome to FreightCar America's second quarter 2016 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 1:00 p.m. Eastern Time today until 11:59 p.m. Eastern Time on September 2nd, 2016. To access the replay, please dial 800-475-6701 and enter the access code 398562. 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 Matt Kohnke, Chief Financial Officer of FreightCar America. Please go ahead, sir.

Thank you, and welcome to FreightCar America's second quarter 2016 earnings conference call and webcast. Joining me today are Joe McNeely, President and CEO; and Ted Baun, Chief Commercial Officer.

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.

Our 2015, Form 10-K and earnings release for the second 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.

Our second quarter results fell short of our expectations. On a sequential basis, our results were negatively impacted by product mix as well as production inefficiencies attributable to first-time car build and labor and material supply issues.

We have taken a number of steps to address the labor and material supply issues and will continue to monitor them closely. However, we will likely still incur some production inefficiencies as we continue to introduce new products.

To that end, we are delighted that we have added Howard Broadfoot to our leadership team as our Vice President of Manufacturing-Shoals. In this role, Howard will lead the Shoals organization, focusing on approving the production processes and continuing effects to grow the facility in a world-class railcar manufacturing operation. He joins us from Electro-Mechanical Corporation, where he had multi-plant, multi-product line responsibility in the Electrical Transmission, Distribution and Control business for the last seven years.

Previously, he held senior operations leadership roles with Thomas and Betts, Newell-Rubbermaid, and ZF Group America. Howard's strong operations and plant startup background, combined with his experiences in the automotive industry in Lean manufacturing, will serve us well in his new role.

Also, in response to macroeconomic headwinds our industry is currently facing, we are implementing a cost-reduction plan which is expected to reduce our annual operating costs by approximately $5 million once fully implemented. Matt will go into details of the plan in a bit. But the takeaway is that we have and will continue to aggressively manage our structure to align it the evolving railcar market.

As for delivery guidance -- we now expect full-year 2016 deliveries to between 5,600 and 6,100 railcars, with the preponderance of the remaining backlog extending into 2017.

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

Thank you, Joe.

Overall, railcar inquiries and orders remained at depressed levels. Commodity loadings on US railroads in the second quarter of 2016 were down 10.9% when compared to the second quarter of 2015. Grain loadings grew by 3.8% in the second quarter of 2016 from second quarter of 2015 levels, but coal, metallic ores and crushed stone, sand and gravel loadings all weakened. Intermodal container loadings also fell by 3.3% over the same time period, which represents the first quarter since 2009 where we have seen a meaningful reduction in intermodal loadings.

Deliveries for the second quarter of 2016 totaled 1,372 railcars, all of which were new railcars. This compares to 2,611 railcars delivered in the same quarter of 2015, which included 1,861 new and 750 rebuilt railcars. We delivered 1,609 railcars in the first quarter of 2016, all of which were new railcars.

Our order backlog at June 30, 2016 was 6,207 railcars with a sales value of approximately $612 million; down from the backlog of 14,075 railcars at June 30, 2015 and 7,735 railcars at March 31, 2016. The June 30th, 2016 backlog reflects new orders taken of 426 railcars and cancelations of 582 railcars that we received in the second quarter of 2016. It should be noted that of the 426 railcars ordered in the second quarter, 227 were rebuilt railcars.

Order levels for the second quarter of 2016 compare to 1,618 units ordered in the second quarter of 2015 and orders net of cancelations of negative 496 units in the first quarter of 2016. As Joe mentioned earlier, we now expect to deliver between 5,600 and 6,100 railcars for the full year of 2016, including 227 rebuilt railcars.

Similar to what we said on last quarter's call, customers continue to struggle with asset utilization as a result of lower commodity traffic, continued high-train velocity, and a high level of existing equipment in storage. Despite customers working to manage through these unfavorable market trends, we believe that the bulk of the order cancelations are behind us.

Looking ahead to the second half of 2016, we expect deliveries to be weighted to the fourth quarter as a result of customer delivery requirements and a major line changeover in July.

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

Thank you, Ted.

Consolidated revenues were $126.2 million in the second quarter of 2016, compared to $235.6 million in the second quarter of 2015 and $148.6 million in the first quarter of 2016. The consolidated operating loss for the second quarter of 2016 was $600,000, compared to operating income of $10.9 million in the second quarter of 2015. Consolidated operating income for the first quarter of 2016 was $19.6 million, which included a pretax gain on the settlement of our hourly retiree benefit litigation of $14.3 million.

This quarter's results on a sequential basis were negatively impacted by several factors. First, our delivery of volumes were lower in the second quarter than the first quarter, primarily due to the slower-than-expected production rates on several new car types and a timing of certain finished railcars that were not delivered until early July. Our results were also impacted by an unfavorable mix of cars delivered in the quarter. Finally, startup costs and production inefficiencies associated with the introduction of new railcar types increased our cost of goods sold.

Selling, general and administrative expenses for the second quarter of 2016 were $8.7 million, compared to $10.9 million in the second quarter of 2015 and $10.6 million in the first quarter of 2016. The decrease on a sequential basis was attributable to the lower incentive compensation expense as well as severance costs incurred in the first quarter of 2016 that did not reoccur in the second quarter.

Turning to our balance sheet -- our financial position remained strong, with no outstanding debt and $84 million in cash and short-term investments at June 30, 2016. Inventory levels of approximately $136 million at June 30 remained relatively unchanged from the first quarter, as we continued to have most of our production lines busy working through the backlog. Looking forward to year end -- we expect to see a reduction of inventory between $25 million and $30 million from current levels, based on existing production and delivery schedules. Capital spending for the second quarter of 2016 was $6.4 million. For the full year of 2016, we expect capital expenditures to be approximately $14 million including amounts already paid.

As Joe mentioned earlier, we are implementing a cost-reduction plan which, when complete, we expect will reduce our annual operating costs by approximately $5 million. These savings will be primarily realized within selling, general and administrative expenses. The specific actions associated with this plan include a 15% reduction in the Company's salaried workforce, the closure of our Johnstown, Pennsylvania administrative office, and the reduction of certain discretionary spending. These actions are currently underway and are expected to be completed by the middle of 2017.

The total estimated costs relating to this program are approximately $4 million, including approximately $2.5 million of employee-related costs and approximately $1.3 million in noncash charges for asset impairments. We expect to incur approximately $1.5 million of these additional costs in the third quarter of 2016 and approximately $800,000 of these additional costs in the fourth quarter of 2016. We expect to realize savings of approximately $1.3 million in 2016 as a result of this program, most of it in the fourth quarter.

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

Thanks, Matt.

Despite a disappointing second quarter and challenging industry fundamentals, we remain focused on executing our strategic plan and are pleased with our progress to date introducing new railcar types into the market. We're also pleased to have Howard as part of our team and to lead the Shoals organization as we look to improve our overall production efficiency, take costs out of the business, and continue to introduce new railcar types.

I'm confident in our operational ability to provide our customers with high-quality products while creating value through our shareholders through the execution of our [strategic] plan.

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

(Operator Instructions) Justin Long, Stephens.

So I know you don't give guidance, but I wanted to get a sense for the ballpark range on normalized margins once you get through these production inefficiencies from ramping new car types. And maybe the best way to ask it is -- how much of a headwind was that in the second quarter, if you can quantify it? And then, just directionally, how would you expect gross margins to trend in the back half of the year?

Good morning, Justin, it's Matt Kohnke.

Let me answer the question related to the second quarter. We had about $2.5 million in costs impacting the gross margin that we would not expect to recur on a go-forward basis. Primarily these costs are related to new product development and higher-than-normal startup costs associated with some of our newer production lines.

As you've said, we don't give guidance going forward on margins; I'd rather not comment on that question.

Okay. That's fine, that's helpful.

And then, maybe this one is more for Joe, but I wanted to talk about the -- or ask about the big-picture assumption that drove the cost-reduction plan. Obviously, by making this decision, you're assuming this weak demand environment persists. But are you managing the business for demand weakness over the next year, over the next two years, or a down cycle that could extend even longer than that?

Justin, this is Joe. As we looked that, again, if you looked at the orders in this past quarter of about 4,300 non-tank cars, that's a relatively low number when you analyzed it. I mean, you look at what the forecasters are predicting -- they're predicting a one-, two-, three-year cycle depending on what you're looking at.

So we're preparing the business for that time, knowing also that we're still introducing car types, and we still have to have the resources to be able to design and take those to market.

Okay, great.

Now, I ask one more and then pass it along. But if the demand environment we're seeing today continues, how should we be thinking about your cash balance going forward? Obviously, your sizeable cash balance helps provide a layer of protection at a below-replacement market or in a down cycle. So you mentioned maybe getting a bit of hit from lower inventories. But if we kind of weigh that against the potential for CapEx reductions next year and everything else, over the next 12 months, let's call it, how do you see the cash balance trending?

I think when you look at the cash balance, I think as we said in Matt's comments, the inventory numbers are going to go down (inaudible) modifies into cash. And as we've talked on prior calls, as the business slows down and your backlog gets built, it tends to generate cash. Offset on that, again, there's really the cash burn from your fixed costs. But I think overall, as we look out, we're going to have adequate cash balances.

Okay. And anything in terms of where you could take CapEx next year, like what CapEx might look like on a more normalized basis? Because I know this year, you still had some impact from Shoals.

Yes. Typically, when you look at maintenance capital, what I would call kind of the normal recurring stuff, it's more maintenance capital. And it's anywhere between $4 million to $6 million for our facilities.

Okay, great. I'll leave it at that. I appreciate the time.

Thank you, Justin.

Thanks, Justin.

Matt Ellcott, Cowen and Company.

Thank you for taking my question.

So you guys have the cost-cutting plan in place to respond to the challenges you're facing. But from a top-line perspective, are these challenges making you take a look at the markets you want to be in? In other words, are you reconsidering your efforts to kind of enter certain railcar type markets in order to focus on other types where maybe have a stronger competitive advantage?

Hey, Matt, it's Ted Baun. I think I'll answer that as follows. We are very comfortable with the car types that we've decided to get into, starting about three or four years ago -- intermodal, covered hoppers, a variety of types -- and diversifying away from coal cars. So there aren't a whole lot of markets that we have left to go into. And we're comfortable sticking with the ones we've got. We think there's long-term demand in those markets. And we think we'll continue to reduce costs in those areas and compete long term.

Okay. And --

Matt (multiple speakers) Joe. Just maybe another point of color. Over the last three years, we've introduce almost 20 different car types as part of our strategy on diversification, so that in a down cycle like we have, we can compete across multiple car types. And so that is kind of the basis of the strategy, and that's why we're pleased with where we're at on the introduction of all those car types.

Okay. And I know you guys have a pretty strong competitive advantage in the open hoppers and the cars that are used for the shipment of aggregates. And with the highway bill passed in December of last year, we're seeing an uptick in maybe inquiries into that car type. Are you guys seeing that? Are you in conversations with your customers [that] you get the sense that people are making kind of long-term bet that infrastructure in the US will be expedited by a new administration, and we'll see a meaningful uptick in that car type?

Yes, Matt, that is one of the markets we're seeing strength in. And we are very close to that market.

Okay. And is that translating into orders, or is it at this point more of inquiries and conversations you're having?

At this point, there are a variety of discussions being had, more on the inquiry front.

Okay.

And just one last one, last quick one -- the cancelations you guys had in the quarter -- what type of railcars were those?

Yes, we're not going to get into the level of details with respect to the cancelation makeup, if you will. So we can't get into those specifics. But what I can tell you is that there were only a small number of sand cars in the June 30th backlog, and all of those have subsequently been delivered.

Got you. Perfect. Thank you very much, guys.

Thanks, Matt.

Michael Gallo, CL King.

I was wondering if you could elaborate at all on where you stand on rectifying some of the production issues. I know you mentioned some of the cars shipped in July. How many cars was that, were that, that shipped in July? And are you fully through the production issues that you had, or is there still more on that to go in the third quarter? Thanks.

I think Ted was just referencing some of the energy-related covered hopper type cars that were shipped. And we don't give out specifics on numbers that those are at. But in terms of the other production issues -- we had a combination of a number of factors, none of which I'm satisfied with and happy with. Now we're getting aggressive in addressing those. But there was a vendor quality issue, there were vendor supply issues. There were some labor shortage issues with some higher-than-expected turnover. All of those -- we've taken a number of different steps to address those. And to the point, as Matt was talking [on] those things, we don't expect to see those going forward. Those things have been addressed.

Now, the introduction of new car types -- as you start new car types, you generally have some production inefficiencies -- those we still do anticipate seeing some of those are we -- there are some new car types we have yet to build and introduce.

Okay. Thank you.

And then, just a follow-up question -- I know you mentioned the administrative office in Johnstown. I think you have a parts warehouse in Johnstown where the lease expires at year end. Is that included in the $5 million cost plan, or would that be separate? Thanks.

No, that's not. That facility -- the parts facility is under lease, and actually extended that lease for a period of time beyond that. So it's not part of the cost reduction.

Okay. Thank you.

Matt Brooklier, Longbow Research.

So just a follow-up question -- Joe, your comment regarding the potential for further order cancelations and having some conviction that we're kind of through the worst at this point in time -- I guess, what gives you that conviction level that we shouldn't see a meaningful amount of order cancelations as the year progresses?

Hey Matt, it's Ted, I'll take that one.

We continue to have dialog with our customers that are in our backlog. And they seem content with where they are right now.

Okay.

And then, with respect to energy-related cars, it sounds like that's a lesser amount of the backlog at this point in time at the end of 2Q?

That's a fair statement, yes.

Okay.

Bigger-picture question -- I'm just trying to get my arms around what you guys look like from a manufacturing footprint perspective. And we know that coal's been in a secular decline for some time now. I'm just trying to get a sense for if there's the potential for further rationalization of your coal manufacturing facilities. Right now, it seems like they're running at minimal levels. And I realize one of them is, I think, shuttered at this point in time. But bigger picture, longer term, what are your thoughts on shrinking what you look like on the coal side of things?

Yes, I think I'll -- the costs are pretty consistent with where we've been. Our Shoals plants most of our new product introductions. Danville [are] primarily coal but other car types that are similar manufacture to those. Roanoke's got a pretty good backlog at this point.

Danville is the one we significantly control operations at. But we do have a small order that we are going to put in there at a relatively slow pace for the rest of the year. And Danville's future -- and all of our plant, really -- depends on the order level that we get for the car types that we can produce.

Okay. So it doesn't sound like imminent plans. I mean, you're obviously doing some things on the cost side, meaningful things on the cost side at this point. It's just -- it doesn't sound like there's going to be a change in terms of potentially maybe consolidating some of those facilities, if that's a possibility.

And then, my last questions -- we have the targeted $5 million of cost savings through some of the initiatives that you're doing. This is in addition to the USW settlement? And then, if it is, can you just remind us of the costs from the settlement that you guys announced, I think it was earlier this year?

Yes. This $5 million is over and beyond that settlement that we settled in the first quarter of this year. The ongoing costs were about $3.5 million of savings as a result of that settlement.

Okay. So potentially plus $8 million of run rate cost savings as we look out over the next 12 months?

Correct.

Okay. That's all I got. Thank you.

Thanks, Matt.

(Operator Instructions) Mike Baudendistel, Stifel.

I just wanted to ask you on the employee reductions, were those employees unionized? And if so, is there anything in the union agreements that creates severance or other issues?

Michael, this is Joe. The employees we talked about, it's a reduction around the salaried workforce. Nonunion.

Okay.

And then, want to ask you -- on the cancelations you mentioned, it seems like you've had more cancelations than your peers in the railcar manufacturing industry. Is there anything different about your backlog -- either fewer of the units in your backlog are to leasing companies, or anything there? And can you also say whether the 500 units that were canceled was result of a bankruptcy?

This is Joe. I'll take that one.

In terms of how we're different than others, I don't know, because I don't know what's in the others' backlog in the conversations that we've had. I'm not sure of the information we have. There's a number of customers looking at certain car types. But we can only report what we report. So I know what's in the other's numbers. And we're not going to comment on the details behind any of the cancelations.

Okay.

And the, significant portion of your backlog is for rebuilds, rather than newly built railcars. You just tell us what you expect the ASP is on the rebuild cars? And maybe just order of magnitude -- I know you don't give absolute numbers -- is it two-thirds? Is it just -- where is it?

Michael, it's Joe. I think the rebuild numbers are actually pretty small in the backlog now. There's only like 227 of it total. So in those, rebuilds are definitely less from an ASP than a new car costs. In this particular order -- know it varies, but in this particular order, it's probably around a half of what a new car would cost.

Okay. Great, that's all I have. Thank you.

Michael Gallo, CL King.

Just a follow-up question. I wasn't sure if I heard it right -- at this point, do you not have any frac sand cars remaining in the backlog? Or is it they're mostly out of the backlog? Or where does that sit?

Hey, Michael, it's Ted. You did hear that correctly. At the end of the quarter, we had a handful of sand cars. And they are now -- have subsequently been delivered.

Very much [as heard].

At this time, there are no other questions in the queue. Please continue.

This concludes today's conference call. Thank you for joining. A replay of this call will be available beginning at 1:00 p.m. Eastern Time today, at 1-800-475-6701, passcode 398562.

See you next quarter.

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