FreightCar America Inc (RAIL) 2016 Q3 法說會逐字稿

Welcome to FreightCar America's third-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 December 1st of 2016. To access that replay, please dial 800-475-6701 and the replay pass code is 404728. 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 for FreightCar America.

Thank you, and welcome to FreightCar America's third-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.

We will also make references to adjusted operating income, which is not a measure in accordance with GAAP. For a reconciliation of adjusted operating income to operating income, the most directly comparable GAAP measure, please see the supplemental disclosure attached to the earnings release.

Our 2015 Form 10-K and earnings release for the third 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 we talk about the quarter results, I would like to take a few moments to address the act of violence that occurred at our Roanoke facility last Tuesday, which resulted in the death of one of our employees and the wounding of three others.

We were all shocked and saddened by this tragic event that occurred that day. We express our deepest sympathies to the family of Daniel Brown, a highly valued employee of FreightCar. Our thoughts and prayers go out to the employees, their families, and those impacted by this tragic event.

We would also like to thank the various law enforcement agencies, especially the Roanoke City Police Department and Roanoke Fire and EMS for their prompt response to the facility when the events transpired. Their support has been tremendous through this difficult time.

Moving on to results for the quarter, the sequential improvement in our third-quarter income reflects the initiation of our production improvement and cost reduction initiatives. As indicated on last quarter's call, we continue to experience some production inefficiencies related to new car type introduction, but we have seen some improvement on this front and continue to implement our plans to increase throughput and improve productivity.

In addition, our cost reduction efforts are on track to realize $5 million of annualized savings when fully executed mid next year. Matt will provide some color on our efforts to date.

As Ted will share with you in a moment, we are in a challenging railcar market and we expect that to continue for some time. However, our backlog is still solid and we expect full-year 2016 deliveries to be between 5,400 and 5,700 railcars.

Looking ahead to next year, we expect the majority of our current backlog to be delivered, along with some new car orders. However, at this time it's difficult to reasonably estimate total deliveries, given the current softness in the market. With that said, we are mindful of the importance of executing our production improvement and cost reduction plans in order to effectively compete in this expected softer market.

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

Thank you, Joe.

Overall, railcar inquiries and orders remained at depressed levels. We received orders for 620 railcars in the third quarter of 2016, of which 100 railcars will be delivered to our lease fleet. Order levels for the third quarter of 2016 compared to 1,008 units ordered in the third quarter of last year, and orders net of cancellations of negative 156 units ordered in the second quarter of 2016.

Deliveries for the third quarter of 2016 totaled 1,214 new railcars, which was in line with our delivery expectations for the quarter. This compares to 2,846 railcars delivered in the same quarter of last year, which included 2,076 new and 770 rebuilt railcars. We delivered 1,372 railcars in the second quarter of 2016, all of which were new.

Our order backlog at September 30, 2016, was 5,613 railcars with a sales value of approximately $557 million, down from a backlog of 12,237 railcars at September 30, 2015, and 6,207 railcars at June 30, 2016.

As Joe mentioned earlier, we now expect to deliver between 5,400 and 5,700 railcars for the full year 2016, including 227 rebuilt railcars.

Industry-wide, 5,526 units were ordered and 15,375 units were delivered during the third quarter of 2016. Excluding tank cars, there were 4,645 units ordered and 11,609 units delivered during the quarter, respectively. Non-tank orders for the quarter declined by 21% when compared to the third quarter of 2015, while non-tank deliveries were essentially flat year over year.

Industry-wide backlog consisted of 77,640 units at the end of September, 2016, down from 122,591 units at September 30, 2015. Excluding tank cars, the backlog totaled 56,323 units, down 33% from the backlog of non-tank cars ending September 30, 2015.

Please note that these industry figures do not include orders, deliveries, or backlog totals for rebuilt railcars.

Commodity loadings on US railroads in the third quarter of 2016 were down 6.9% when compared to the third quarter of 2015. Grain loadings grew by 17.4% in the third quarter of 2016 from third quarter of 2015 levels, but coal, metallic ores, and crushed stone, sand, and gravel loadings all weakened. Intermodal container loadings also fell by 3% over the same period.

Lower customer asset utilization as a result of the lower commodity traffic, continued high train velocity and a high level of existing equipment and storage has led to lower new car orders and reduced level of railcar repairs, which has negatively impacted our parts business.

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

Thank you, Ted.

Consolidated revenues were $113.5 million in the third quarter of 2016, compared to $241.1 million in the third quarter of 2015, and $126.2 million in the second quarter of 2016.

The consolidated operating loss for the third quarter of 2016 was $52,000, which included $1.5 million of restructuring and impairment charges, compared to consolidated operating income in the third quarter of 2015 of $22.9 million. Excluding restructuring charges, adjusted operating income for the third quarter of 2016 was $1.5 million compared to adjusted operating income of $18.3 million in the third quarter of last year, and an operating loss of $600,000 in the second quarter of 2016.

Adjusted operating income in the third quarter of 2015 excludes the gain on the sale of our railcar repair and maintenance services business. The increase in adjusted operating income versus the second quarter of 2016 reflects favorable pricing on cars delivered in the third quarter and the effects of productivity improvements that Joe previously mentioned.

Selling, general, and administrative expenses for the third quarter of 2016 were $8 million compared to $10.7 million in the third quarter of last year and $8.7 million in the second quarter of 2016.

In connection with the previously announced cost reduction plan, we incurred $1.5 million of restructuring charges in the third quarter, including $1.3 million related to a noncash asset impairment charge, and $0.2 million of employee-related costs. Going forward we expect to incur an additional $1.5 million of additional restructuring charges, most of which are personnel-related costs.

We remain on track to realize annualized savings of $5 million once fully implemented by the middle of 2017 as a result of this plan.

Turning to our balance sheet, our financial position remains strong, with no outstanding debt and $46 million of cash and short-term investments at September 30, 2016, which is down from $84 million at the end of June. The decrease in cash is driven by the timing of several large items.

Inventory associated with rail cars in production, and finished railcars, all of which is contracted to be sold, increased by $12 million from the end of June.

Accounts receivable also increased from the end of June, due to the timing of new railcar deliveries, and has already been collected.

Lastly, cash was used to reduce accounts payable as we continue to take advantage of short-term cash payment discounts and the timing of inventory purchases.

Looking forward, we still expect to see a meaningful reduction of inventory, with a projected year-end operating inventory balance of approximately $100 million. As a result, we expect cash and cash equivalents to approximate $85 million to $90 million by the end of this year. These projections are based on the existing production and delivery schedules and can vary significantly, depending on the timing of delivery and the payment from our customers.

Capital spending for the third quarter of 2016 was $4.3 million. For the full year of 2016 we expect to incur capital expenditures of approximately $14 million, including amounts already paid.

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

Thanks, Matt.

This year has seen a number of changes to our senior management team. I'm pleased that we were able to bring Jim America on board as our Vice President of Human Resources. Jim's an experienced human resources executive with a well rounded background in manufacturing.

With Jim's hiring, we now have an experienced leadership team to lead our company through these challenging times, to ensure we are producing a high quality product for our customers and displaying commitment to our employees, all the while maintaining the Company's financial strength.

While we made strides in the third quarter, we are committed to executing our production improvement and cost reduction plans to better position us for the expected challenging and uncertain market conditions ahead.

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

(Operator Instructions) Michael Gallo; CL King.

Couple questions. I guess number one, it was nice to see the improvement in orders. I was wondering if you could speak to where you saw that, whether that was a lot of little orders or just car types, and whether -- do you expect to be able to sustain some amount of positive orders going forward and, with that, whether you feel you've derisked the backlog at this point and going forward we should see positive orders?

Ted, why don't you take that?

Sure. The orders that we booked in the quarter, Michael, are essentially a few different car types. We're not going to get into the specific details, but we were pleased with them. I would say going forward, it's just going to depend on future inquiry levels, which are admittedly soft right now. But we're actively looking into the market and pursuing a few opportunities.

And then in terms of just the backlog at this point?

The backlog we feel is solid. The backlog is based -- backed behind or backed up with firm contracts with firm cancellation clauses. We do continue to have dialog with a very select few customers. The vast majority of customers appear very satisfied with their order position. A few others are still trying to find their exact place where they want to be in the backlog.

Okay, great. And then just question for Matt. Matt, good to see that you expect to see some of that working capital to come down next year. I was wondering, as we kind of work through next year and you kind of start to run through that backlog, how much working capital do you think you can ultimately take out, assuming the current order environment stays soft and you continue to see that backlog really work its way down over time?

Mike, we haven't put any commentary out on 2017. What I would say is as we continue to deliver the backlog and the overall working capital should decline, absent replacement orders off the existing book of business that we have. So I think the logic that you mentioned makes sense, but we haven't put any specific commentary out on 2017 yet.

Okay. All right, thanks very much.

Matt Ellcott; Cowen & Co.

I'd like to stay on the order frontier for a second. The number you guys -- the order level you had in the third quarter represents I think the third sequential increase in orders, granted from a very low level in 4Q. Is there something we should kind of read into it? Is it a function of you gaining some more traction on certain railcar types? Or is it just a function of the normal lumpiness of the industry?

Yes. Hey, Matt, it's Ted. We certainly have diversified our product portfolio and we have a number of different freight car offerings for our customers. But I would say it's more to the point of just quarter-to-quarter lumpiness at this point.

Got it. And the reduction in the 2016 delivery guidance, I think the midpoint of the new guidance is about 300 units below the midpoint of the guidance you gave in 2Q. Can you talk about what caused that?

Yes. Nothing real specific other than just timing of where we're at in our current production through the quarter, and then also kind of expectation where a couple of large orders may or may not deliver at the end of the year. But nothing specific.

Okay, fair enough. And just one last question. You said that a significant portion of the current backlog will be delivered in 2017. Can you give some more color on what significant means? Is it 80%, 90%? And can you also talk about the cadence of that delivery? Are you expecting it to be more first-half weighted or second-half weighted?

This is Joe again. I think there's only a few hundred cars that are expected right now at this point to carry over into 2018.

And in terms of cadence with the current backlog, it's fairly even, but maybe a little higher in the first half of the year than the back half of the year, just given where the production plans are at the moment. But, again, that doesn't include any potential new orders that may come in between now and next year.

Great. Thank you very much.

Brian Colley; Stephens.

So we saw the demand environment for coal get a little bit better this quarter [than] over the past six months I'd say. And I was wondering if we saw coal volumes up next year if you saw the potential to at least stimulate some level of orders associated with replacement demand or rebuilds next year.

Hey, Brian, Ted here. We've seen some recent data points that have been positive with respect to coal. But we really don't see demand in the near term increasing as a result of those data points. There's still a number of coal cars in storage, so it's going to be quite a while until that hits equilibrium.

Okay. That's helpful. And then, could you give any help in terms of your expectations for SG&A in the fourth quarter after accounting for the cost reduction plan and just thinking about the cadence of those reductions going into mid next year? Should 4Q be a pretty good run rate, or are you going to see a meaningful step down?

Yes. We continue to implement our cost reduction plan. The first part of that started it in the third quarter when we announced the plan. We should see SG&A in the fourth quarter, as a result of the full quarter impact of what we've eliminated in the third quarter, should continue to decline from third-quarter levels.

And then come fourth quarter, once the plan is fully implement - -- excuse me, come 2017 once the plan is fully implemented, in the second half of next year we should see it more stabilized after all the cost reduction efforts are put into play.

Okay. Thank you. And then my last question was just on Shoals. I think you guys have mentioned that Shoals is a higher fixed cost facility because of some of the technology and equipment. Is there anything you can do to reduce fixed costs at that facility as we head into what could be a prolonged period of weak demand?

Brian, again, I don't know that we've talked specifically about a higher fixed cost. Overall we think it's an efficient facility, given the automation out there allows us to compete on these new car types. And, again, I think as with any of our production, and any of our competitors, given just the high fixed-cost nature of manufacturing of rail cars that you do have some operating leverage you lose as production volumes go down. But, again, with our backlog that we anticipate getting delivered next year, our production numbers still appear to be reasonable.

Okay. Thanks for the time.

Mike Baudendistel; Stifel.

Just wanted to ask you -- your delivery guidance implies that the fourth quarter is going to be somewhere between 1,200 and 1,500. And I think you said that there could be some variability in the timing of when those units are going to be delivered. Is that just a timing issue? Or any sort of -- intuitively I wouldn't think that the production rates would be any higher in the fourth quarter than in the third quarter.

No. This is Joe. I'll take that one. Again, the range in there really reflects -- you may remember, as we've talked in the past, we deliver railcars in groups, 25, 50 and even 100 or more at times. And we've got a couple mix of those in our current production. So it's hard to pinpoint a number any more accurate than we've got for the fourth quarter.

Okay. And I think I heard you say that 100 out of the 620 orders in the quarter were for the lease fleet. Is that a preference that your customers are sort of demanding, is that they want to lease rather than own? And is that something you're planning to grow significantly, your leasing capabilities?

Mike, Ted here. You know, we'll take a look at lease fleet opportunities as they come about. Customers do want a mixture of both lease and purchase. And we'll be opportunistic where it makes sense for us to do so.

Okay. And I just wanted to ask you, you said most of the backlog is going to be delivered in 2017, with not much in 2018. Are you having customers come to you requesting delays in some of those delivery dates? I mean, we've seen that from some of your competitors.

Yes. As we mentioned before, we are engaged in those conversations, but they're few and far between at this point. We don't anticipate a really big movement in customers wanting to push out those deliveries.

Yes, I think as Ted said earlier, the vast majority of our customers are comfortable with their orders and their production schedules.

Okay. And on the cost cutting initiatives, I know you said that second quarter next year should be finished. Would you say you're about midway through that cost cutting? Or can you sort of quantify how much you've already cut out of the $5 million?

Sure. So we are probably at about the midpoint of the cost savings initiatives on our personnel-related costs, as well as some of our other SG&A savings along the way. So for the year of 2016 we expect the costs of implementing the program exclusive of the $1.3 million of restructuring charges to be offset by savings that we realize in 2016. And then those will continue to accelerate in 2017.

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

Matt Brooklier; Longbow Research.

Are there any sand cars left in the backlog at this point in time?

Matt, this is Ted. And there are no sand cars in the backlog.

Okay. And then I just wanted to confirm the rebuilds that you have in the backlog -- I think they numbered, like, 227 at the end of 3Q -- the expectations are all of those cars will deliver in fourth quarter?

Yes, that's the expectation.

Okay. And then just with respect to your gross profit margin in the quarter, is this kind of a good normalized margin to assume moving forward? Is there anything to think about next quarter in terms of potential line changeovers? I'm just trying to get a sense for if this is a good base to kind of work off of as we move into 4Q and next year.

Yes, Matt. It's Matt Kohnke. So we don't really give guidance on where the margin's going to be. What we've said before and we'll continue to say is, in the competitive marketplace we expect overall gross margins to be in that single-digit range. When the market's a little tighter we expect it to be in the low double-digit range.

Okay, that's helpful. Thank you for the time.

And at this time there are no further questions here in queue for us.

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 800-475-6701, pass code 404728. See you next quarter.